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8/10/2019 Rosen Wald
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1601 Cloverfield Boulevard, Suite 5050N Santa Monica, CA 90404 | www.daltoninvestments.com
Ben Graham Centers Value Investing
ConferenceIvey Business SchoolApril 2014
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This document does not constitute a solicitation of any shares in any investment vehicle managed by Dalton Investments LLC.
Such solicitations can only be made to qualified purchasers by means of the private placement memorandums, which
describe, among other things, the risks of making an investment. Additionally, this presentation does not constitute
investment advice of any kind. Opinions and estimates offered constitute our judgment and are subject to change without
notice, as are statements of financial market trends, which are based on market conditions.
STRICTLY CONFIDENTIAL
Not For Distribution
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Whats wrong with this picture?
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Brokers generate revenues frominvestment banking commissions
Investment banking clients(corporations) benefit from bullishratings
Only 5% of S&P 500 companyresearch reports are sells
Sell side analysts
Misalignment of Interests
48.8%46.0%
5.2%
Buy Hold Sell
S&P 500Analyst Ratings
Source: FactSet, October 2013
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Misalignment of Interests
Brokers
I know you purchased the stock
at $50 and now its $10, and they
filed for bankruptcy. But lets not
read too much into that
Brokers generate commissionsbased on trading turnover
The incentive is to maximizetransaction volume
Investors want the best investment
ideas
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Misalignment of Interests
Higher ratings can lead to additional business and revenues.
Rating Agencies
Investors want independent,objective ratings for bonds
Ratings agencies are paid by thecompanies whose bonds they arerating
In 2007, more than half of newlyissued mortgage-backed securitieswere rated AAA*
*Source: Milken Institute
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Misalignment of Interests
Higher ratings can lead to additional business and revenues.
IPOs
*Selected from top 10 HK-listed IPOs of 2013 by market capitalizationSource: South China Morning Post, November 2013
Company * % pricechange onday one
% changesincelisting
Sinopec Engineering -0.38 -3.05
Chinalco MiningCorp International
-6.29 -25.71
China Harmony Auto -16.12 -12.83
WuzhouInternational
5.74 0.00
PanAsialum -13.08 -44.07Termbray Petro-kingOilfield Services
26.83 40.85
Time WatchInvestments
2.22 -40.74
Issuing companies want to maximizecapital raised
Investment banks want to maximizecommissions
Investors want a favorable price, but
IPOs tend to be overpriced andunderperform
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Misalignment of Interests
Higher ratings can lead to additional business and revenues.
State-owned enterprises
An entity created by a government toundertake commercial activities onbehalf of the state
Managements interests tend to bemore aligned with politicians than withshareholders
Objectives other than maximizingprofitability; ex. maintainingemployment, growing asset base
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Japanese keiretsus
Misalignment of Interests
Japanese conglomerates withcomplex holding structures acrossmultiple subsidiaries
High inheritance tax in Japan dilutesfamily ownership
Management receives high cashcompensation but little performance-linked compensation
Salary OtherCompensation
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No incentive for breaking form
Alignment of Interests
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Individual incentives
aligned with group
Alignment of Interests
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Alignment of Interests
Skin in the game
*Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life
To have "skin in the game" is to
have incurred monetary risk bybeing invested in achieving a goal
Warren Buffett used the term todescribe a situation wheremanagements interests are aligned
with those of shareholders*
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Alignment of Interests
Skin in the game for executives
Management should own at least 5x
their annual salaries in companyshares
Managements stakes shouldrepresent the majority of theirpersonal net worth
Management = owner-operators
Salary CompanyShares
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Alignment of Interests
Skin in the game at Dalton
Investment professionals place 50%
of their annual bonus into the firmsfunds
Investment professionalsbest ideasare in the firms portfolios
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Alignment of Interests
Family businesses
Familybusiness?
Survivaloriented(%)
Growthoriented(%)
ControlOriented(%)
Yes 77.5 64.6 69.0
No 22.5 35.4 31.8
*Study conducted on 922 UK businesses by Manchester ScienceEnterprise Centre, 2003
Company is run by the founder
and/or founders family
Majority of the familys wealth is inshares of the company
Familys name and reputation are
tied to the business
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Alignment of Interests
Family businesses
As owners, the family benefits when
other shareholders benefit
Managers think like owners, notemployees
More skin in the game
Alignment ofInterest
Margin ofSafety
BusinessQuality
Family businesses
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Alignment of Interests
Case Study: Himax (HIMX US)
Himaxstake90%
OtherInterests
10%
Wu BrothersSource of Net Worth
Wu brothers collectively own 27% of
the companys shares
The stake represents nearly theirentire net worth
Source: Dalton estimates, Bloomberg
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-- Lee Shau Kee, 1998Founder of Henderson Land
He purportedly received US$190 million in dividends,tax-free
Mr. Dividend
All my friends ask me,' Am I number one in theworld in [receiving] dividend payments?Leetells Forbes during a recent interview in his
splendid headquarters high above Hong Kongscentral office district. I say,' I dont know, askForbes.
Alignment of Interests
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Founder Company Salary
(2012)
Dividends received
(2012)
Chung Wai Ping Tao Heung US$28,000 US$6.7 million
David Chiu Far East Consortium US$350,000 US$6.2 million
Li Ka-Shing Cheung Kong US$1,200 US$422.8 million
Tycoons bank on dividends
Alignment of Interests
Source: Capital IQ, Bloomberg
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Dividends vs. Salary
Hong Kong
Alignment of Interests
Income taxes, while low, are muchhigher than dividend taxes
Executives minimize taxes bypaying higher dividends in lieu ofhigher salary
Shareholders benefit from higherdividends
RegionFlat
IncomeTax
DividendTax
CapitalGains
Tax
Hong Kong 15%* 0% 0%
*Residents have an alternative option of choosing a progressive tax with rates upto 17%Source: Deloitte, 2013
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Alignment of Interests
Dividends vs. Salary
Singapore
RegionTop
IncomeTax
DividendTax
CapitalGains
Tax
Singapore 20% 0% 0%
Residents are taxed at progressiverates up to 20% on income
Singapore residents also benefitfrom zero dividend taxes
Incentivizes owners to pay highdividends over high salaries
Source: Deloitte, 2013
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Alignment of Interests
Dividends vs. Salary
Japan
RegionTop
IncomeTax
DividendTax
CapitalGains
Tax
Japan 52.1%* 20% 20%
Japan historically has concentratedcompensation in base salaries
Japanese firms hold large amountsof cash
In recent years, dividend payoutshave been on the rise
*40% national tax + 10% local tax + 2.1% surtax starting in 2013Source: Deloitte, 2013
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Alignment of Interests
Dividends vs. Salary
Russia
RegionFlat
IncomeTax
DividendTax
CapitalGains
Tax
Russia 13% 0-9%* 0%
Dividends are taxed at 9% forindividual residents
Income tax comparatively higher at13%
Incentive is to pay higher dividendsversus higher salary
*Legal entities that own over 50% of a subsidiary are entitled to receive dividends tax-freeSource: Ernst & Young, Deloitte, 2013
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Alignment of Interests
Dividends vs. Salary
India
RegionTop
IncomeTax
DividendTax
CapitalGains
Tax
India 30% 0% 0%*
The top marginal tax rate in Indiafor individuals is 30%
Individuals do not pay taxes on thedividends they receive
Entrepreneurs pay lower taxes viadividend distributions than viasalary.
*Exempt if held longer than one year; otherwise taxed at 15%Source: Deloitte, 2013
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