The article below is a rare Vincent Tan interview with The Edge Malaysia back in 2010. For those who do not know, Vincent Tan is a prominent businessman in the Malaysian corporate scene. He founded Berjaya Corporation – a conglomerate which houses many well known businesses from Berjaya Sports Toto, Starbucks, 7-11 to Cosway etc. Vincent Tan is not a man who always talk to the media. In this interview, Vincent Tan offered plenty of business wisdom which allows readers a peek into his mental models of businesses. [My comments in RED]
Entrepreneurship is about trying new things
When you have to sell, you have to sell. You have to sell to pay the banks. During the crisis, when you needed the umbrella the most, and when it rained heavily, they took away the umbrella. An oft-discussed issue is the under-valuation of Berjaya Corp Bhd, helmed by chairman and CEO Tan Sri Vincent Tan. Based on sum-of-parts valuation, BCorp — the holding company of an array of assets ranging from property to gaming and leisure — should be worth much more. But the market does not accord the group’s assets the value they deserve. However, Tan says there is a new gem in Berjaya Group in the form of Cosway, which is shaping up to be the biggest business he has ever built up. In an interview with the The Edge, Tan explains why Cosway will be the biggest thing for Berjaya in the years to come. He also talks about DiGi.com Bhd, which he had sold, and U-Mobile Sdn Bhd, his current telco arm. Below are excerpts of the interview.
[The undervaluation of Berjaya Corporation Berhad is not new. I have read plenty of analyst reports showing how severely undervalued Berjaya Corporation is based on sum-of-parts valuation. Now, seven years have lapsed since this interview and it is indeed intriguing that Berjaya Corporation is still not given the valuation it deserves by the market. At some point, market players have got to think – is sum of parts valuation the best valuation method to assess Berjaya Corporation as an investment candidate?]
The Edge: What are your expectations from Cosway?
Tan: Cosway has the potential to become the largest market cap company within all the businesses I am involved in.
Bigger than Btoto, which has a market cap of about RM5.9 billion?
Yes, I think it can be bigger than BToto. It’s not far from BToto’s market cap now, actually (Cosway is worth HK$9.71 billion or RM4.21 billion on a fully diluted basis on a share price of HK$0.77). Cosway has the potential to be in so many countries. Of course, in the earlier years, I pushed Al (Chuah, managing director of Cosway) to go overseas. But, at that time he wasn’t ready. So we went into the Philippines, Mexico and Brazil and we ended up losing quite a bit of money. But it was a good lesson. In recent years, Al has improved the business model and found the right formula for Cosway to go overseas. It’s not easy to do business abroad. If you are a Malaysian company, and not from a developed country, naturally people don’t think you can market all types of products overseas. But Cosway has shown it can do that successfully.
[VT seems to be incredibly bullish about the prospect of Cosway. Back in 2010, Cosway was already valued at RM 4.21 billion. One thing that VT likes about Cosway is the ability to scale beyond the local market. Here, VT also highlighted the challenges that Cosway faced in the early years of expansion. Basically, a strong brand name matters doing business abroad. Thus, it seems that Berjaya Corporation has an international company parked under its umbrella.]
Why inject Cosway into your listed vehicle in Hong Kong, instead of a local listing?
Because half of Cosway’s profits are now from abroad. Also, the Hong Kong stock market offers much better liquidity and has wider, better and more international investors. It is a perfect place to list, because Cosway has done well in Hong Kong. People there know about the brand and we have close to 100 shops in Hong Kong. From there, we are also selling into China through the Internet. We actually sell more to Chinese in China than to the residents of Hong Kong. Of course, now the revenue is booked under our Hong Kong operation, because we don’t have a direct-marketing licence to operate in China yet.
When can you get the direct-selling licence in China?
We are still in the process of getting it. We are confident of getting it, as we are a genuine operator, and also [because] our group has some investment in China. I know direct selling or multi-level marketing has this image of a pyramid scheme, but there’s no collection of money in the Cosway business. In Cosway, we open the store and you come and operate… you don’t have to come up with much capital. Because of this concept, we believe the Chinese government will welcome us. We can create many jobs in China and contribute to its economy.
[Fast forward to 2017, it seems Cosway has secured and built a presence in China. To learn more about Cosway China, do visit http://www.coswaychina.com.cn].
How did you get to know Chuah? How did BCorp start the direct-marketing business?
Chuah was the marketing manager for [US-based pharmaceutical company] Sterling Drug. Then he quit his job and set up Cosway with four friends. They all put in RM20,000 each to start the company, with total capital of RM100,000. Along the way, they were short of capital, and then we came calling (in 1993). There was an element of luck as to how BCorp got into the direct-marketing business. I was on a plane to Singapore one day and sat next to a Chinese man. Because I travelled alone, I started a conversation with him. The guy said he was flying to Indonesia (through Singapore) to look after his direct-selling business there. That got me interested. After that, I called one of my executive directors and asked him to look for any direct-selling company for sale in Malaysia. We shortlisted three and then zeroed in on Cosway, which at that time was talking to other buyers as well. Finally, Al’s partners decided to sell out to us, and we paid RM24 million for an 80% stake (in 1994). Al said he wanted to keep his 20%, but he kept it for six months and then decided to sell. I actually asked him, ‘Are you sure you want to sell?’ I said think carefully, because I think we can grow this company together. But he said he preferred to put RM6 million in the bank, work for me for one more year, and then do something else. So we bought the remaining stake from him, and after so many years, he is still with us. He doesn’t own any stock, but he is happy and committed because he has seen the company grow. Of course, I think I have also taken quite good care of him.
[This is an interesting account of how VT got into the direct-selling business. The most important wisdom from this story is do not underestimate the importance of networking (Do not be shy to initiate a conversation!).
For those who are currently employed, it is also wise to have a stake in the company especially when it is a capital light compounder.]
Cosway has an ambitious plan to open 3,000 new stores in the next two years. How does it plan to fund the expansion?
It doesn’t require much capital, because it is a marketing business. We can handle such an expansion using internal cash flow. But of course, we would also like to pay some dividends to shareholders. Cosway has virtually no borrowings. So we can, for example, give half or three-quarters of profits as dividends and use the remainder of the cash flow to grow the business. But if there are immediate opportunities and we need bigger capital to grow, we can borrow some money. Cosway can gear up. With its track record, I think a lot of banks, whether local or overseas, would want to do business with Cosway.So to your question, funding is not a problem. For instance, to set up in China, the government actually requires us to own some factories there to produce some of the products. Why not? Even if we invest RM300 million to RM400 million there, it is not a problem. We can raise the funds through our own cash flow or borrowings. We could also place out new shares, but we don’t think this is necessary.
[While Cosway is best known as a direct-selling company among consumers, it seems that Cosway is in fact a marketing company at its core.]
The value of Cosway is not reflected in BCorp, the major shareholder?
It will, it will, whether on the basis of sum-of-parts or [others]. You know BCorp… I run it like an entrepreneur’s company because that’s who I am. So BCorp tends to venture into new businesses that we never got into before.
People don’t like you putting so many businesses into BCorp?
People often say you should only do business that you know. But what business did we know in the first place? When I bought BCorp, it was a steel wire rod company. If we [had stuck] to the wire rod business and did nothing else, then perhaps we would be the biggest manufacturer of wire rods in Malaysia. But we didn’t. I was also McDonald’s partner in Malaysia (got the franchise deal in 1981). So does it mean that I shouldn’t be doing anything else, apart from selling hamburger? I think entrepreneurship is about trying new things. If you have good gut feeling and are able to organise the management for the business, you should do [new things]. [When] I started DiGi — it was called Mutiara Telecom — I didn’t know how to run the telecoms business. So I organised the management, put in the capital and brought in a foreign partner to help run the business. But remember, only after we managed to grow to 50,000 to 60,000 subscribers did we look for a partner (Swisscom). I didn’t go and get the mobile licence and straight away hog the licence!
[In the investment community, Warren Buffett has popularized the concept of circle of competence. Basically, Warren Buffett advocates investing only in companies that you truly understand. Personally, I think this is a very important concept of investing.
However, VT seems to have a contradicting view of his own (perhaps due to his entrepreneurial DNA). VT believes that you do not need to fully understand a business before venturing into it. In fact, VT thinks when you are positive about the future of a particular business or industry and are able to put together a management for the business, then you should go for the home run.
Hence, man management – the ability to put together a group of talented people to realize a specific vision, is a skill that should not be under-looked by any aspiring entrepreneurs.]
You actually sold DiGi later.
I had to sell DiGi when the Asian financial crisis struck. I had to complete this huge building here (knocks on the conference table in BCorp’s office on the 12th floor of Berjaya Times Square). This building is the one that cost me my DiGi. This is one hell of an expensive building for me, in terms of opportunity cost. If not, my DiGi shares would be worth… when I sold the company, [it] was worth RM4 over billion, now it is five times more! If I had kept the stake and sold now, I would have made RM10 billion profit! But of course, I still made a lot from the sale. It’s okay. So now, I had better make sure I keep Cosway (laughs). Apart from DiGi, I also had to sell Prudential Life, even [though it was] a very successful company. It was worth RM1.1 billion then, but today, I think it is worth RM7 billion to RM8 billion. What to do? I mean, when you have to sell, you have to sell. You have to sell to pay the banks. During the crisis, when you needed an umbrella the most, and when it rained heavily, they took away the umbrella.
[Well, DiGi is worth almost RM 40 billion today. In terms of opportunity cost, this one seems huge. When you had to sell, you had to sell. But VT is not a man who dwells on lost opportunities. What did he do after losing DiGi? He invested into a new telco company in U Mobile.
Another lesson here is leverage. When liquidity dries up in the capital markets, suddenly every bank becomes reluctant to lend.]
Other than Cosway (injected into Hong Kong late last year), BCorp has a lot of exercises going on.
Yes, there are a lot of exercises. Like we say, sometimes investors would prefer investing directly in specific businesses. They think BCorp is… But there are also a lot of investors buying BCorp. We (BCorp) have a lot of shareholders, a lot of small Malaysian shareholders. But we also have some institutional shareholders who believe in us. They talk to me often, [though] I may seem not to be talking often… I don’t like to get into the news.
What is the sourcing strategy for Cosway?
We prefer the OEMs (original equipment manufacturers) to manufacture for us. We get top manufacturers and suppliers to produce for us, from Taiwan, South Korea, Japan, Europe, Italy, the UK, France and also the US. Let’s say later we go to Turkey, we will also source some products there. We would support the local industry by helping them to export. I am sure there will be some good products that we can sell within that country and also abroad. So we are like an import and export company, but at the same time, we do direct distribution to the consumers. So, when you come to Cosway, you can buy products from all over the world. But of all the products we sell, we label them with our own brand names, such as Bioglo and Oriyen. These brands are owned by Cosway.
[VT talking about Cosway’s business model. Although Cosway has the potential to become a huge distribution company or authorized/exclusive reseller of existing brands in the market, the company chose to market all products under their own brand name. For those who have been in the retail business, an in-house brand is always more valuable than distributed brands in the long term with more control over the marketing and distribution of the former products.]
What about Berjaya Retail?
BRetail will be Malaysia-based. It may also look at other opportunities overseas, but we don’t know yet. It’s still early. We may want BRetail to do other things. It now has the 7-11 franchise and Singer, we will see if there are opportunities for us to expand these two, or other similar businesses overseas. Actually, in BCorp, we own some franchises that we can expand overseas. Like Papa Johns Pizza, for which we have the first right of refusal to a lot of Asian countries. Papa Johns is a very successful pizza chain in the US, and it has also proven to be successsful here. We are planning to grow this franchise within the region. We also own Kenny Rogers — we are actually the franchiser, after we bought over the US company. So even Kenny Rogers can be a big business, but we also have to tread carefully. Sometimes, if we go too aggressively, and if our formula is not right, if our management is not right, it can be quite a painful experience. But Cosway is ready.
You were quite bullish on Berjaya Land two years ago. How is it doing in Vietnam?
We are working on BLand for some of the deliveries (launching and sale of property projects). It will be more active this year with more launches. Of course, people say the Vietnam economy is up and down. But Malaysia has also gone through phases like that, up and down. But in the long term, Vietnam should do very well. [It has] all the right ingredients for economic success. It will take a while. I always believe that in order to build a business to be successful, you need a minimum, from my experience, of about 10 years, and maybe 15 to 20 years for the business to be very successful. Look at how long it took for Cosway to be successful. We bought Cosway in 1994… it only become a success after 15 years. When we bought over 7-11 (franchise in Malaysia) in 2000 from Antah Holdings, it only become successful after 9 to 10 years. I won’t say it is a great success, but it is reasonably successful. The same thing [happened] when we started DiGi in 1995. Its success only came 10 to 12 years later, and it’s only in the last few years or so that its market cap went up a lot. But of course, I had to sell DiGi in 1998, only four years after it was established. That was a terrible time to sell.
[This is perhaps the most brilliant idea that I have learned from this interview. What does VT mean here? Basically, VT thinks that 10 years is the bare minimum amount of time required for a business to reach critical mass – the point which a company matures and starts to produce sustainable earnings going forward. The lesson here seems to be patience and long term orientation in managing a business which is becoming rare among the modern entrepreneurs.]
So it will take a longer time for U Mobile to become a success as well?
I think if given 10 years, U Mobile will become a very successful company [despite people saying] it is no good. But we know what we are doing.
[Last weekend, The Edge ran a cover on U Mobile. According to the article, U Mobile has managed to garner about 10% market share in the telco market and is close to breaking even in the next few years. VT’s “10 years rule” seems to hold true.]
When are you going to get a new foreign partner for U Mobile?
It’s almost there. U Mobile is a private company and so we don’t want to talk too much about it publicly.
Parkson has been in China for a long time, but Cosway is only just starting there…
Yes, but where else can Parkson go? Apart from China and Vietnam, Parkson cannot go to the US, Europe, South Korea or Japan. But where can Cosway go? Everywhere. Russia is in our plans; Europe is in our plans. Take a look at Esprit Holdings, a Hong Kong apparel company. How much is its market cap? Fantastic, US$8 billion to US$10 billion. But Cosway can also do apparel! Al can sell you bras, panties, corsets at one-third or half the price of others, but with very good quality, and it can even be from the same manufacturer.And Al says we can also sell handbags, shoes… So after Cosway has a pool of shops, we can just set up another shop next door to sell the fashion products. When Cosway has millions of members around the world, these members won’t mind buying fashion or apparel from Cosway. I am talking about the middle- or lower-middle-class consumers — of course we don’t talk about those who can afford LV or Gucci. That’s what Cosway can do. Think about it, Cosway has the potential to become the Walmart of direct selling. Of course, when we say this, people may laugh. You know I started so many businesses, everybody laughed at me, but when we finally made it up there, nobody laughed. When I started DiGi, one banker friend said, ‘Eh, what they hell you know about telecom, and you are borrowing RM500 million on personal guarantee, you are crazy.’ Precisely, I said, because of the guarantee, I cannot let it fail. He asked why I was so sure. I said I studied a lot, I think it is okay. I read extensively, so I know it is doable.
So you see yourself very much as an entrepreneur…
Yes, I think I am. Some people say I can start businesses but cannot manage them. Sometimes, our business fails… because we just got the wrong person running it. When I get an idiot to run the business, the business also goes idiotic. [When] businesses don’t do well, very often it is because of wrong people running them. So I am actually very excited about Cosway, because we have Al.
[If you do not have the know-how to run a business, it is important to hire somebody smart.]
As Bursa Malaysia lacks good listed companies here, would you have relisted Cosway here?
The Hong Kong stock market has the depth and liquidity. A lot of investors go to Hong Kong, so the market there is very active. Also, Cosway is an international company. If I list Cosway here, I am not doing a service and justice to my (BCorp) shareholders. The shareholders are not just ‘Vincent Tan’ alone. Yes Vincent Tan owns 53% of BCorp, but there are 80,000 people owning the remainder. There are a lot of Malaysian retail investors who have faith in me buying BCorp shares. Okay, the Malaysian funds don’t buy. The analysts analyse and analyse and they say no good, they don’t buy. But the retail investors buy our shares.
Would you not relist Cosway at all, and keep it as BCorp’s core business?
To give recognition to the value, we need to list Cosway. If I keep Cosway in BCorp’s books, everybody would think it is only worth RM300 million to RM400 million. And they are not wrong, because I delisted Cosway (in 2007) on the basis of about RM400 million, and that it had other business inside also, such as Singer. So we delisted it. Two years later, a US investor came [wanting] to buy 10%. So I said RM100 million for a 10% stake, because I valued the company at RM1 billion at that time. The investor said, why so expensive, because we just delisted it for so little money. I said, yeah, that was why I delisted Cosway, because nobody wanted to buy the shares. So if you want to buy, it is RM100 million for 10%. So at the end, he agreed to pay RM100 million for 10%. So straight away, someone had valued Cosway at RM1 billion. Now Cosway is worth some RM4.8 billion, that investor is up 380% on his RM100 million investment.
[No businessman would like to see their business undervalued. A smart businessman would always privatize an undervalued company when there is an opportunity to do so.]
But still, the value is not reflected in BCorp shares…
Have you seen me at any road show? But of course, maybe I should talk more to investors. It is also the reason why we list Cosway, to let investors recognise its value so that it can then be reflected in BCorp as a holding company. You don’t need to be a top analyst to calculate that if Cosway is worth so much, then BCorp should be worth this much. For Cosway, at 80 HK cents, we don’t want to sell the shares or ICULS. I have told some funds, we will sell some shares or ICULS at HK$1, which is another 20% or more.
Would you consider distributing some Cosway ICULS to BCorp shareholders?
We may consider that, but nothing definite. But if I distribute the ICULS, I also get 53% of it, because I own 53% of BCorp. We have so many shares and ICULS in Cosway. If I give away 10% in Cosway, I get 5.3%… that’s not bad at all. But we will see. I think analysts and fund managers will eventually see value in Cosway, and also BCorp. But if they don’t buy Bcorp, it doesn’t matter. They should go and buy Cosway, which is more focused and easier to analyse. BCorp is a little more complicated. In a year, BCorp can sell several businesses and buy several new ones, and it is difficult for them to keep track.
On BCorp’s undervaluation…
We did pay some good dividends. In 2008, we paid 9% (nine sen) dividend, and the stock was then trading at 50 sen to 60 sen. That was almost a 20% yield! Last year [was] not a good year, we paid 1%, but we gave them some shares in Berjaya Media. Berjaya Media has got a spread problem. If we don’t distribute some shares, Bursa will delist it. Personally, I think if you do the sum-of-parts valuation on BCorp, it can be worth RM3.85 to RM4.57 a share… so I could be worth many dollars more. Personally, I think it will get there over time, especially when Cosway delivers. Cosway will do extremely well in three years. For example, Cosway has just started in South Korea, and we have only 91 stores. We think we can open 2,000 to 3,000 stores there. Very simple, their population is almost twice as large as Malaysia’s, and has much higher spending power. Can you imagine if we have 2,000 to 3,000 stores in South Korea, our revenue could potentially be US$2 billion from just one country! This is my dream. But over time, I learnt… if you plan properly your dream can come true.Listing Cosway is unlocking value, and opening the eyes of investors to Cosway and to BCorp also. Let’s say Cosway is worth RM5 billion now. And with BCorp owning over 80% of the company, its stake is worth over RM4 billion. That’s just the market cap of BCorp now. So you mean all other businesses under BCorp is worth zero? Even our Mazda franchise (under BCorp) is worth a lot. Mazda is doing very well, and in fact we are planning to assemble Mazda cars locally. It can also be a good business. Don’t forget, we used to handle Hyundai … we invested RM100 million into the business and sold for RM1.2 billion.
Would you say that BCorp will be very different three years from now?
I think so, if investors are willing to stay with us for the long term. We have good businesses. Of course, we have gone through ups and downs. But we have built up our businesses.
This article appeared in Corporate page, The Edge Malaysia, Issue 790, Jan 25-31, 2010