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How to Analyse an Economic Moat

The term “Economic Moat” was likely created and popularized by the famous billionaire investor Warren Buffett.

For decades in Buffett’s professional investing career, he has counseled others on how they should invest in a company with a strong moat. This moat then acts as a barrier to entry for other competitors.

However, a company’s economic moat is not constant; it can be widened or narrowed with the passage of time and societal progress. As investors, we have to understand whether a company possesses a moat and also be alert to the factors that could affect that moat, if any.

For illustrative purposes, we’ll examine the strength of the economic moat of three companies listed in Singapore.

1. Genting Singapore (SGX: G13)

When Resorts World Sentosa, owned by Genting Singapore, finally opened its doors in Singapore in 2010, it helped create a high barrier to entry for other competitors vying for a share of the pie.

That’s because at the current moment, Genting Singapore is one of the only two operators that are legally allowed to have a gaming business (i.e. casino) in Singapore.

This apparent economic moat possessed by the company should nevertheless not be mistaken as a duopoly-advantage;  it’s likely that most of the revenue from Genting Singapore’s gaming business is still derived from tourists, who can travel anywhere in the world for a gaming experience.

Thus, Genting Singapore also faces the threat of an emergence of other gaming centers in the region or even a rise in gaming-related taxes from Singapore’s government.

2. Jardine Cycle & Carriage (SGX: C07)

Jardine Cycle & Carriage generates most of its revenue from its subsidiary, Astra International. Astra, a conglomerate listed in the Jarkata Stock Exchange, has a core business surrounding the automotive industry in Indonesia.

It has huge economies of scale in the automotive distribution business that no other competitor can come near in replicating. Astra also holds exclusive rights for distribution of famous automotive brands like Toyota, Daihatsu, Isuzu, BMW and Peugeot in Indonesia. With such a strong network and partnership with brand owners, it has created a large economic moat that is still very strong today.

3. Singapore Airlines (SGX: C6L)

Singapore’s flagship carrier Singapore Airlines created a moat through the building of a brand that is associated with quality and safety. For many years, it has been rewarded with numerous awards from industry magazines and market researchers. This allows the company to have slightly better pricing power as compared to its competitors. However, with the rise of low-cost carriers, the airline is seeing its moat shrink amid intense price competition.

Foolish Bottom Line

It’s hardly the case where a company’s economic moat  lasts indefinitely as businesses earning above-average returns will attract an ever-increasing number of competitors.

Therefore, when we are looking into a company, it is safer to start with the assumption that its economic moat would shrink and that the industries it is in will return to perfect competition. That’s done before we start drilling down into the various strengths, or lack thereof, of a company’s moat and whether it’ll last.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.