It was March 2009.

After 18 months of financial storms, economies all around the world slowed significantly. Shares of company Green Lantern, led by the founder’s own son then, had been mercilessly sold down to a pittance of its past glory, with its market cap kneeling at a mere 20% compared to when the founder passed the mantle to his son just ten years ago.

With the onset of the Great Financial Crisis, the company slipped into its first ever two years of sequential losses. Not only were the usual consumers missing, but the entire retail category was under threat from the new, cheaper and better eCommerce offerings.

The founder’s son, in a sincere effort to chase back these customers, went into a frantic mode to expand into new retail categories for the first time, creating a new retail chain of a supposedly parallel category (but which is not!) And while sales rose for a few short years, the management team found themselves engulfed in a sea of fiery expenses. In a mere 5 years, the company’s sales declined about 20% while its cash reserves were drawn down by 70%. The company was truly on the verge of bankruptcy as their increased net-debt position now looms critically over their decreased equity base, with the net-debt-to-nta well above 1x.

In Lifelong Assets classes, I often joked “imagine if you are promoted to be the Chief Financial Officer of so-and-so company. With its financials in this state, what is the first thing you would do?”, to which the most creative answer I received so far was “I will cry first.”

[The “official” answer is that these CFOs’ hands are so tied behind their back that they cannot do much except typically cut costs, write down earlier committed goodwill and intangibles, sell some assets, or raise new equity at the expense of current shareholders.]

That was the situation Mr H was in when he took over from the founder’s son, and he was tasked the monumental challenge of turning the business around, by hook or by crook. It would have been easy to simply cut costs by laying people off and close loss-making stores.

Instead, Mr H, who had been by the founder’s side since its early days, and by then was a long-serving general to the business, shared: “I remembered how our founder started way back in the days, where he would insist on personally cleaning the company toilet.”

“I was shocked at first and could not understand why; I told our founder that he has an important role to lead the company and he should not be doing these menial tasks.” Mr H continued, “But our founder shared with me, and I wrote it down in my handbook and to this day still live by this principle – He told me that is the first principle of doing business in Green Lantern, this is what allows us to stay grounded and truly understand what is going on in the business by getting our hands dirty, not in a humiliating way but in a humble way.”

“Wow, how big is this man’s heart to live like that?” Mr H pondered in awe…

It was because of this humility and a genuine heart to serve that Green Lantern prospered; it was never only the fancy stuff they were selling, nor the newest gadget that customers bought. With this principle in mind, Mr H was inspired to do things differently, yet with the same values. Instead of having a tighter control over his “subordinates”, Mr H relinquished store decisions to his lieutenants-in-comrade and worked on having an improved communication system instead. Through such interactions as well as his on-the-ground experience, the management team quickly discovered the root of the problem as well as the solution – more service, less product “sales”.

Because of the increased uptake of eCommerce, customers realised they could buy just about anything online and at a cheaper price – so why is Green Lantern needed?

As it turns out, Green Lantern happens to be in a retail category where workmanship is highly valued and sorely needed – customers simply do not have the skills to do some of these critical works, even if they have the tools, time, and energy.

Mr H outlaid and executed an ambitious plan – they cut focus on product sales and went all-in to increase services.

Instead of retrenching some of his 3,000 staff, Mr H went on an expansion plan amidst the downturn to reduce the staff per store, thus hitting two birds with one stone – increasing service points and taking care of staff. As a result, their average store size reduced and the productivity per store increased.

Sales began climbing again, and the business turned profitable within 12 months. In the ten years since, they repeatedly hit record highs, increasing their revenue by 50% and operating income by 300%. Take a look at their results here.

What made this endeavour even more amazing was that during the same ten years, their number one peer, and much of the fragmented industry, were stagnant in revenue and profits, and still insisted on their old way of selling more products, thus being overwritten by the increasing swaths of eCommerce competition. This means Green Lantern was growing their market share faster than their number one peer as well as the industry, while continuing to do what they are best in and being more relevant amidst the eCommerce opportunity!

In more recent years, they’ve made use of their service standards and increased scale to launch innovative services which allow their loyal customers to get premium services at a ridiculous 40% discount to their closest peer, who finally caught up after many months of shock in awe. That their peer caught up was no big issue because firstly, they are probably the only ones who can sustain this discounted, yet profitable service. Secondly, Green Lantern’s stores are scattered across the country’s suburbs and ran at a much lower cost base compared to this peer’s large city stores still insisted on selling products.

Meanwhile, the market is still pricing Green Lantern at a single digit P/E valuation despite its net cash accounting for about 20% of their market cap in this highly challenged economy with the ongoing protectionist trade negotiations.

The stock market winter may be arriving, and it may last a while, but there are limited places to hide – bonds are priced at all time highs hence giving historically low yields, while stocks of most high quality companies are priced ridiculously high, disguised in the name of “value investing” when it’s mostly “momentum trading”. Even gold has increased ~20% in prices recently. [For more info please read the postscript sources below.]

And yet the Fed cannot increase interest rates – this is like saying the Singapore government wants to add a cooling measure to curb property price runaway increases but they cannot do so, hence the citizens have no choice but to bear with buying more expensive houses, like what is threatening the social fabric of Hong Kong with residential properties priced at 2% capitalisation rates with 60 year leases (generally speaking at 2% capitalisation rate, it takes 50 years to “get back” 100% of the price paid, hence leaving a 10 year “free” lease for the occupants, so when their cap rates hit 1.66% it literally becomes cheaper to rent for life regardless).

All these beg the question – when there are no more “higher grounds” to go to, what next?

Granted, they may remain at a high for an extended period of time, but we see an increased chance that some may start to fall, and when they do, it will likely be painful – a drop from any high place will likely cause pain.

A select group of businesses stand a chance to grow despite all the drama, and their characteristics are 1) high quality business, 2) honest management and 3) low valuations. 

This is our game plan, we only look at businesses that can grow ten times in ten years, specifically at low valuations so expectations are not already priced in.

P.S. Pigeon, Asia’s best-selling baby milk bottle brand, with the number one market share in China, was priced at ridiculously high valuations for a very long time before recently even their most optimistic investors have begun to pull out, https://asia.nikkei.com/Business/Companies/Pigeon-investors-wary-of-baby-bottle-maker-s-Chinese-e-tail-boom

P.S. Historically low rates in bond yields, even lower than their central banks’ overnight deposit rate, across diversified markets in US, EU and Japan, https://www.reuters.com/article/us-global-yields-collapse/the-incredible-disappearing-bond-yields-idUSKCN1U31BI