Friday, March 05, 2010

Kingsmen Creatives - Analysis of Purchase Part 1

I purchased shares in Kingsmen Creative on January 25 and 26, 2010, and the following few postings will elucidate the thought process and analysis which went into the rationale for the purchase decision. Note that some of the factors which led to this decision are qualitative by nature, and are also known as “intangibles”, but are nevertheless important in assessing if a company is suitable for investment. Though an objective assessment would be difficult to predict if a Company will continue to do well, a somewhat rational look at the business model and Management quality does give some hints as to what may come. That said, an investor should always prepare for some risk of partial permanent loss of capital, no matter how thorough or detailed the research is. My job is to minimize the risk of loss, and maximize the probability of gains over a decent period of time; and as the business grows.

This analysis will be split into several sections, of which I will cover the industry in which Kingsmen operates, its competitive climate, its financials, fundamentals and business units (divisions); and also its prospects, plans and investment merits (and demerits). Part 1 will touch on their business, industry characteristics and Profit and Loss + Balance Sheet.

Introduction – Kingsmen’s Business

Kingsmen Creative was formed in 1976 and has, in all this time, been a leading provider of integrated marketing solutions; as well as specializing in its core businesses of Museums and Exhibitions (of which it assists in organizing and setting up), and Retail and Commercial Interiors, which it helps to do fitting out. It has staff strength of about 1,100 in Asia Pacific and Middle East and is a member of many associations, examples of which are Interior Design Confederation and Singapore Retailers’ Association. Kingsmen’s name is synonymous with quality and they boast an impressive clientele of blue-chip names ranging from The Gap, FJ Benjamin and Burberrys just to name a few. They have also participated in events such as the F1 Singapore Grand Prix and also the upcoming Shanghai Expo in 2010. More details of their clientele base can be found on their website. Their name “Kingsmen” actually originated from the separate words “King’s” and “Men”, which represents the belief that the customer is of paramount importance and should be served by men with commitment and integrity.

The Company is 25.1% owned each by Benedict Soh and Simon Ong, who are its founders since its inception and who are in charge of the strategic decisions and overall direction of the Company. Collectively, they own 50.2% of the company and the rest (49.8%) is the free float. The Company was listed in 2003 and has a track record of boosting revenues and earnings every year since listing, as a result of the growth of the MICE industry in Singapore and South-East Asia.

Industry Characteristics and Outlook

Basically, it is clear from the description above that the Company is in the Events Management and MICE (Meetings, Incentives, Conventions and Exhibitions) industry. It provides a niche service and is able to cover a comprehensive range and suite of services to enhance value for the client. There are not many big names within this space as most of the smaller event organizers take part in smaller-scale events. The largest company and Kingsmen’s strongest competitor is Pico Far East, which is listed in Hong Kong and is about three times the size of Pico. More will be mentioned about Pico under “Competitive Analysis” in Part 3. Suffice to say that most of the players in this industry are smaller players who do not have the scale, expertise and track record to carry out extensive and complicated projects for big-name clients.

The outlook for this industry is positive, at least for Singapore and South-East Asian region. There are many large corporations and conglomerates which plan to set up shop here in Asia and Singapore, as a result of Asian economies booming and China being the next growth engine. Big retail brands are also setting up more retail outlets in Asia as consumer spending power increases, and this all means more business for all players who concentrate on the South-East Asian region. The latest news is that more car dealers have plans to set up new showrooms in Singapore; so far three have opened in Jan 2010 alone and more are set to follow.

On the MICE front, Singapore is fast becoming a hub for such events, and it had hosted the APEC Summit successfully in 2009 and also the F1 Grand Prix since 2008. More plans are underfoot to grow Singapore into an MICE hub, and the completion of the Integrated Resorts (“IR”) will accelerate this process. Singapore is well-known for its strong economy and stable political structure and this will attract many event organizers to showcase events here, thus expanding the pie for all players, both large and small. Even in South-East Asia, countries such as China are hosting the Shanghai Expo, while the Middle East also has events coming up in which will make use of such niche services. South East Asia is fast becoming a hub for attracting major events such as motor-shows, air shows, major conferences as well as trade events. Eventually, the flow-through effects will trickle down to all players in this industry in the form of higher revenues and better earnings.

Financial Review – Profit and Loss Statement Analysis (for 3Q 2009)

From the table above, plotted from FY 2003 onwards, it can be seen that Kingsmen’s revenues have seen a steady rise from S$53.5 million in FY 2003 to a high of S$190.6 million in FY 2008, in just a span of 5 years. 9M 2009 revenues were S$151.6 million, and as 4Q is traditionally their strongest quarter, the FY 2009 results may yet surprise on the upside. However, if we observe the trend of revenue growth, it was mostly due to the expansion of Kingsmen into various new markets such as China, Vietnam and Middle East which helped to grow their revenue base. Singapore also saw heightened activity in the form of more conventions, roadshows and exhibitions and recently, there were new malls opened (e.g. ION Orchard, 313 Somerset and Orchard Central) which required fitting out by retail chains moving in to expand their market share.

Gross profit was also consistently on the rise and tracked the rise in revenues, but the important aspect to look at is gross margin, which represents control of cost of sales and related expenses in earning the income. Please note that some depreciation costs are incorporated into COGS as stated in the Annual Report, while the rest is reported on the face of the Income Statement. Gross margin hovers around 26-28% over the 5-year period, with a spike to 30.7% in FY 2008 which I would regard as an anomaly. The current 9M 2009 gross margin is 26.4% which is in line with historical precedents, and is also a result of Kingsmen taking on higher value contracts which offer better revenue visibility, but slightly lower margins. By contrast, Pico Far East has margins as high as 33.8% (for 6-months ended April 30, 2009 – they have an October year-end), but as we shall see, both companies’ net margins are roughly the same and this puts Kingsmen’s performance roughly in line with Pico as far as profits are concerned. It may also indicate that Kingsmen has some room for improvement of their cost structure as Pico is the market leader which has managed to achieve a much higher gross margin.

The bulk of expenses for such event management companies comes from staff costs, as many staff are needed for consultancy, project management and event co-ordination. Staff costs thus makes up 15% of revenues for 9M 2009, but has increased by less (+14.3%) than the increase in revenues of 18.4% (year-on-year). Since staff costs are mainly made up of fixed costs, except for sub-contractors who may be hired on a wage basis or temporary workers on casual wages, the Company should be able to scale up its business without incurring too much overheads in this area, assuming there is tight and proper control over the allocating of human resource and personnel.

In terms of net margin, Kingsmen does not exhibit very high margins. In fact, net margins of around 6-7% are the norm for companies in this industry, as I had also observed Pico’s half-year results and they had margins of just 5.8% even though gross margins were higher. What’s notable is that Kingsmen had managed to raise their net margins from a low of 2.9% in FY 2003 to 7.4% in FY 2008, and current 9M 2009 net margins are at 5.9%. One point I would like to reiterate is that high net margins are not necessarily a sign of good financial statements, as there are still the elements of Balance Sheet and Cash Flow Statement to analyze. For instance, China Fishery had net margins of 20.3% in its latest FY 2009 financial statement release; but its Balance Sheet was in heavy gearing and it had negative free-cash-flows (“FCF”). This is not to say that lower net margins can justify an investment, but taken as a whole, I am willing to consider other factors which affect my investment decision even though this is one aspect of the company which is a “minus”.

Balance Sheet Review and Comments (as at Sep 30, 2009)

As can be seen in the table above, current ratio has remained fairly constant at about 1.30 over the years, and this is also broadly in line with competitors (though a UK-listed competitor had much worse current ratio by comparison). The days receivable started out quite poor at about 156 days back in 2003, but has improved gradually over the years and as at FY 2008 it stood at 79 days. The Company has been in net cash ever since listing in FY 2003, and the Cash Flow analysis will delve into why this is so, and pick up a few salient aspects of Kingsmen’s cash flow management.

Return on equity has been very high considering there has been little debt. ROE started out at 12.5% in FY 2003 and has increased to 33.2% in FY 2008. I would consider any ROE above 20% to be very impressive as the company’s equity base keeps growing, thus maintaining high ROE is not an easy task. ROE is a much better measure than EPS, and I shall be using it for future analyses.

Due to the fact that I had neglected to analyze some key ratios and trends in my previous investment mistakes (namely Ezra and Swiber), I have now included them in the table below. These include growth in revenues versus growth in trade receivables, trade payable days compared to trade receivables average days; as well as the Cash Conversion Cycle. It is known that clients pay an upfront deposit of up to 30% in cash once a contract is sealed, and this acts as a buffer in cases where customers may be slow to pay due to financial difficulties or due to crises like the one just past.

One can observe that the growth in revenues had outpaced the growth in receivables in all years except FY 2007. There is no adequate explanation for this that I can think of, except to postulate that it might be either a timing difference or the fact that Kingsmen had secured larger contracts from FY 2006-FY 2007 period which led to longer credit terms being extended. Whatever the case, this occurred only once in the five years under review, thus I would conclude the growth in receivables is in line with the growth in revenues, and that receivables are managed well. A quick glance at the FY 2008 Annual Report also shows that of the S$41 million trade receivables as at Dec 31, 2008, about S$8 million (20%) are past due but not impaired. An allowance of just S$1.69 million was made for doubtful debts, which constitutes just 4.1% of total trade receivables. Moreover, Kingsmen’s list of clients are also broadly diversified and they do not rely too much on any one event or customer; so this also mitigates the risk of them being bogged down by bad debts should a major customer go bankrupt.

Trade payables, on the other hand, had not increased as much as COGS in the strict sense. COGS had nearly quadrupled since FY 2003 from S$38.6 million to S$132 million but trade payables increased by just 250% from S$11.5 million to about S$28.7 million. Trade Payable days however, was consistently lower than trade receivable days, meaning Kingsmen were paying creditors sooner than they collected money from debtors. The gap was narrowing from FY 2003 till FY 2006 when it suddenly widened to 30 days in FY 2007 due to the spike in Trade Receivables. In FY 2008, the gap was closed when both ratios registered the same number of days (i.e. 79 days). For FY 2009 thus far, there appears to be a gap of –17 days again and I feel part of the reason is because customers are asking for lengthier credit terms as the economy is still weak, and also partly due to the larger contracts secured by Kingsmen.

Part 2 of the analysis shall touch on the Cash Flow Statement, as well as go in depth into the business divisions of Kingsmen.


donmihaihai said...

I am surprise that Kingsmen is a big fish in this industry especially considered the fact that this industry is complete on at least regional or global basis.

Since it is non capital intensive, why no competition from related but bigger players in the A&P, media, consultancy, etc come in. I don't see it hard for them to enter even in term of relationship --- their customer A&P budgets can easily goes into multi million dollars and these money goes to where...

I see no technologies contrain. This is a business of know how, repution and relationship which come from people and people move around. From this, I see if big player don't come in, there is no reason small players don't step up.

So the last part is if this industry is new or a sub-industry of another industry and with margins almost equal to return, then I see no reason why their margins will not react +ive or -ive to competiton or even from their customers who may have multi million budgets.

Talking about intangibles or competition, what I see is simple. If the pie is big and return is good, big fish from related industry come in not just with huge resources but providing integrated services. If the pie is small, people move around and lot of small fishes. Other than that their customers can never be left out.

Musicwhiz said...

Hi Donmihaihai,

Thanks for the comment. Let me see if I understand you correctly....

Kingsmen (KC) is not a big fish in the sense that it is not a conglomerate or large organization spanning many staff across many countries (like Boustead for example). What it does have, however, is expertise, quality and a long track record of handling international major clients. Bigger players are like Pico who have also established themselves firmly in this niche space. in the 30+ years since KC was set up, there are only a few major players such as Pico and one or 2 from USA and UK. The rest are relatively smaller players who focus on small road shows and fitting out shophouses of smaller, local brands.

It is hard for a new player to enter at this point in time because they would need the familiarity, track record and experience in handling fitting out and the relationship needs to be built up over years. This is something of a reputational issue, and yes you are right in that technology is no constraint. In fact, much of their business is reliant on manpower and scale.

Small players have the problem of not being able to achieve the type of scale which KC has achieved; hence they have high fixed costs and will not be able to survive for long; thus they cannot tender for larger projects. So it's a chicken and egg situation - you need to be large and reputable to bid for such contracts, yet such contracts will make you large and noticed!

The pie is good and growing, but the competitive moat has been established. Yes, it's easy to set up a company to do the same thing which KC is doing. But try replicating it on a large scale, staffed with experts who have the know-how and experience accumulated over years. This is what international clients look for. You could be stuck as a small player for a very, very long time, assuming you have the cash flow generative ability to survive.


donmihaihai said...

So I see, same thing but totally diff views.

Those that are in capital intensive industries will usually say that the amount of investment made by them will prevent new competitor. The service or management industries will say relationship, reputational and track records will be their edge, their advantage, new players don't have that.

Then why is it that new players keep appearing and many make it big?

I see Kingsmen is doing very well but I see completition coming, be it from new player or from related industry.

I said Kingsmen is a big fish because this is a small pond(the industry). A shark don't swim in a small pond. But a fast growing pond with very good profitbility and without much contrain is a place for fish fights

Musicwhiz said...

Hi Donmihaihai,

To be honest, I am not very sure what you are trying to imply, or even what you mean.

You had already illustrated your point about Ezra last November on your blog and it was convincingly argued that it was in a capital intensive industry and so needed lots of capital through fund raising and debt to be able to sustain operations. Hence it was not perceived to be a good investment. I totally agree and I have validated it through the numbers and from corporate announcements.

But now you seem to be saying that service industries give the "excuse" of relationships, reputations etc to argue that competitors find it hard to break into the market. Could it be true that this is really a reason why such companies can build up good rapport and do well, with an international clientele? It's quite strange that you say new entrants keep coming in. Any evidence of this happening in the MICE space? Do note that Kingsmen was established in 1976 and so has 34 years of experience servicing clients and growing its customer base. The point is they were only listed in 2004 but their name has been around much longer and has always been synonymous with quality. I have also mentioned competitors such as Pico Far East which are the market leader (HK-listed) and smaller players like Cityneon. Would you care to name some other major players who can boast such clientele?

I disagree that this is a small pond. In fact I think the pond is in fact a very large sea, if you look at the potential contracts and projects coming along in SEA region. What makes you think that the MICE and Exhibitions/Fitting out space is "small"? I hope you can support your views with numbers to make a more concrete argument.

You sound a bit contracdictory when you say Kingsmen is "doing very well", yet you seem to imply there will be significant competition coming in to erode their business. Is there any justification for this claim?

Thanks, and hope I interpreted what you said correctly.


simon said...

hi musicwhiz,

what's your expectations on the company's ROE going forward? do you think they'll be able to maintain that kind of level? if it drops to 20% in 2010, would you still be holding on to your stock? and lets assume this happened due to declining business climate?

and you mentioned that their margin, roe etc. both improved from 2003 to 2007/08. so what exactly did they do to bring about this improvement? or is it just due to overall improvement in the business climate? My sense is they didn't do much....

and do you have any figures as to how big the exhibition and fitting market is that they are in right now? maybe we can get a sense of how big their market share is in 2003 and compare it to 2007 or 08 and in various countries that they operate in. i would give more credit to management if they were able to increase their market share in singapore in those years.

btw, what % of a MICE business goes to these companies?


Musicwhiz said...

Hi Simon,

Thank you for a good set of questions. These are thought-provoking and very well-posed indeed!

I would expect double-digit ROE moving forward, though probably not consistently above 20% as this is hard to maintain over the long-term as the equity base increases (due to retained earnings). However, note that the Company does not need to do equity issuances, thus there will be not much of a risk in significant dilution in ROE or DPS. Haha I would think 20% is a very high figure to do long-term for any business, hence I would be comfortable even if ROE drops to the teens. As long as the economics of the business cum industry remain favourable, and the financials strong, I will continue to be a shareholder.

Yes, the increase in margins and ROE are attributable to an improved MICE climate, not just in Singapore but regionally in SEA and also Middle East as well. Take note that most of Kingsmen's business comes from Singapore, and now a larger portion comes from China as well as Dubai (Middle East). Their increased fortunes are not fully in tandem with economic cycles as the Great Recession hit the whole world from 2008 onwards, yet the Company managed to grow revenues and profits nonetheless. You mentioned the Company "didn't do much", but in the last few years they had expanded to other countries and set up offices there as well to take advantage of the booming MICE industry and also to extend their services to international clients which have offices or retail outlets there. I view this as building the foundation for sustainable growth in the medium-term.

You can refer to this link:-

It mentions that in 2006, MICE raked in S$4 billion in tourism receipts for Singapore. In Singapore's 2015 plan, the STB intends to raise this figure to S$10.5 billion. This is an increase of about 250% in just 10 years, or about 25% increase per annum. The same article also talks about China, Bangkok and Hong Kong building up their MICE industries, so it gives a good backdrop on what Asia can provide in terms of opportunities for Kingsmen's business. In other words, the pie is growing for all players and Kingsmen is one of the beneficiaries.

Another 2008 article here:-

It mentions the theme park industry which is set to grow 5% annually to hit US$8.1 billion by 2011, and which Kingsmen has developed competencies in after working on Universal Studios. Note too that for Universal Studios, rides need to be refurbished every 2-3 years and new rides will be installed, providing consistent and recurring revenues to Kingsmen.

Yet another article here:-

This mentions that MICE business is set to boom next year as well.

By looking at the fact that many players can be involved in one mega-project, I can safely conclude that the pie is growing and there is enough additional business to go around for ALL major players, including Kingsmen.


donmihaihai said...

forget about Ezra or anything related to OSV as there is nothing related to Kinegsmen. But before that, I would like to say, Capital intensive or non capital intensive business, dont automatic imply investment return. Well, Charlie Munger recently said Standard Oil is the only one that provided good shareholder returns for the past 100+ years or so and that is Standard Oil. Well, Standard oil was in capital intensive business and its current forms are still in the same business.

Note: If you are interested, check out Standard Oil and how the it controlled the market and how the regulation forced it to split. That was a 1st class business lesson.

What I am try to point is competition. Using an outdated model developed around 1980 by Porter. While it is outdated -- while it is not "blue ocean" type of new stuff, it is good.

So in short, I see competition, more competition.

Simon asked a good question. What happen if ROE dropped.If I was as clear as him, I would asked the same question.

And I would look for answers like what would be the profit like, valuation like, why it happended, what will be like going forward.

Lastly, I think I must put it clealy. I asked not because I think you make a mistake in this mistake. Well, I don't care. I asked because 1) I think it is interesting to talk about competition in this case, or 2) I think you are wrong on this competition part. Nothing more, nothing less.

donmihaihai said...

------I asked not because I think you make a mistake in this investment.

Royston said...

Hi MusicWhiz,

Thanks for the analysis! I'm also personally keen in making some investments in KC, seeing that they've grown from strength to strength since their listing in 2003.

In terms of reputation, its also good that they've clinched high profile contracts, which will definitely benefit them in the long run.

Only thing holding me back is i'm not so sure they're currently trading at a fair value. I personally believe that the MICE industry is set to grow both locally and regionally in the near future. And being one of the more established players, KC will benefit in the long run.

Musicwhiz said...

Hi Donmihaihai,

Thanks for clarifying. I will take a look at Standard Oil. I guess your concern is whether Kingsmen can deliver long-term returns based on current prospects and valuations. Well, frankly that is a question mark but I don't desire supernormal returns, just a decent return on this investment.

As for competition, we have to agree to disagree I am afraid. Of course there will be "competition, competition". Which company is immune to competitive forces? I've studied Porter's Model as well. I would even go as far to say that the companies you own are also subject to punishing competitive forces, which can render one's evaluation obsolete as things can be very uncertain.

I wish I had a crystal ball, but I can't see the future and please don't expect me to make forward projections and the like. All I can depend on is the economics of the business, track record and Management quality. The rest is murky (as investing always is). We invest based on incomplete information, but we still have to invest!

And don't worry, I know you are just pointing out about competition. You did not imply that I was making a mistake.


Musicwhiz said...

Hi Royston,

Thanks for visiting and your comments. As to whether Kingsmen is trading at fair value, we will know soon enough as the months pass by and they start announcing results. Hopefully they can clinch some of the scenic and thematic works projects which are simmering, and also continue to build on their existing competencies.

I also have the same view as you (i.e. whether fully valued) with regards to VICOM. That's what's holding me back as well.


donmihaihai said...

"I would even go as far to say that the companies you own are also subject to punishing competitive forces, which can render one's evaluation obsolete as things can be very uncertain."

I have no prefect investment and You have my invitation --- to voice and disagree on anything. The last one I got was for Banyan Tree and I love that.

Save the agreement and those feel good stuffs for someone else.

Musicwhiz said...

Haha Donmihaihai,

I think you should try to relax more and not get too serious. My impression of you is that you are a good investor who can take criticism, but perhaps you can learn to lighten up. I have no wish to criticize any of your investments, even if it is constructive. My aim is just to learn more about mine and to hopefully dig out more gems.

So chill bro, and take care!


donmihaihai said...

criticism? Maybe you need to relax more.

When someone came out and said Banyan Tree is swimming with debts and with unsolved lawsuits that could cripple them. I don't take that as criticism.

Stock investment is serious business. Hitting out the defects is like pulling out the weed. I think so!

In the future, if you disagree with what I see on any particular stock and if you are free, point it out. It doesn't matter who is right. But I will be nasty if it become criticism. Thanks

Musicwhiz said...

Sure Donmihaihai!

I totally agree investing is a serious business.

But for me, I split criticism into two types - Constructive and Destructive. Constructive means everyone can learn from it, and is being put across succinctly, tactfully and in good faith. This is the type of "criticism" I like to accept. On the other hand, destructive criticism involves degrading, insulting comments which do not add value. I will also not tolerate such comments.

So don't worry, if I see anything worth pointing out I will do so on your blog!

You have a great week!


cif5000 said...

Allow me to add. My idea of good investing is to continue finding faults in a stock especially after I purchased it. If someone came to me and raised a flag, I will assume it is red in color. Then I will go through a fact finding process, first to prove that it is indeed a red flag, and if I can't then I will look for dis-confirming evidence. Such is the thrill of investing.

Investing is about killing the best loved ideas. If an idea can't be killed, then it must be intrinsically good or that something is still missing.

For KC, it is clear that competition is intense. Any T,D or H can do what KC is doing, albeit on a different scale, since capital is not intensive. If I could, they are like the renovation contractors and interior designers.

You have also identified the key asset of this business - human. One important thing to know is that this asset is a lease-hold one. And the management would not know when the lease will run out. If this asset get really good, they will have to either pay a higher maintenance fee or the asset could soon become a new competitor. Not to forget, this new competitor, although new, will have the reputation because of previous work experiences with KC's customers. Accounts can changed hands very quickly. In the best case scenario, these good assets become KC's contractors, which also translates into higher cost.

A contract-based business.
- Price sensitive (for all customers)
- Reputation (for new customers)
- No screw-up (for existing customers)

If I were a KC shareholder, I would rather the pie not grow. Then everyone remains status quo and the industry does not attract large predators. Maintain the ROE with dividends, and keep the margin high and easy.

The problem will come when the overheads get large and the competition comes in. KC bids more desperately and the predators (you don't know who yet) might have better GLOBAL reputation.

Let's skip to I-Promo. If a senior manager there decided to venture out and starting bidding for event management contracts, what will happen?

In essence,
External: A growing pie attracts predators
Internal: No security in key assets.

On a personal note, try not to defend a company just because you own some shares in it. If you can, attack it to bring down this investment idea. No doubt many hours have been spent before arriving to the transaction, but do not fall victim to "commitment-biasness".

Musicwhiz said...

HI cif5000,

Always a great pleasure to get comments from you, as I value your expert opinions.

I agree with the red flags and about fact-finding. The fact is that I do agree with Donmihaihai on the entrance of more competition, and I was providing a counter-argument to that.

But, as you have raised, if the pie grows then competition will come in. But the question is whether competitors can attack the "moats" which Pico and Kingsmen have built up in South-East Asia. Other reputable companies in this industry are more focused on USA and Europe (from my research). So unless you are suggesting a NEW player suddenly comes up and manages to sign on international clients (with not much track record, that's unlikely), otherwise I do not think it is a big threat.

Still, I do appreciate you and Donmihaihai bringing this up. I concur with you that investing is about finding what could go WRONG with an investment rather than focusing on what's right. In this case I had thought about this issue long and hard and came to the conclusions which I mentioned earlier.

As for your point on assets (people) changing hands, I had always maintained the impression that Kingsmen's customers will remain with Kingsmen the Company, and not just stick to a particular account manager. But I concede you may be right as I never thought of it that way. So indeed humans can be "poached" by competitors. However, the reputation of Kingsmen also hinges on the two founders, so that mitigates the risk somewhat.

You gave some good examples of what might happen, but I still maintain my stance that a sturdy reputation and the presence of scale will allow Kingsmen to win over the competitors, notwithstanding some major upheaval in the industry (which is possible, of course). While I cannot discount a "one-man show" upsetting the balance in terms of market share, I had spoken to a friend who ran a small event management company and he said it's tough to survive because of the lack of economies of scale to reduce costs. I will list that as a mitigating factor.

I also need to clarify - I am not "defending" anything. This is a constructive argument and I think I managed to learn a lot too. If I was so eager to "defend", I would not have readily admitted huge mistakes of judgement in Ezra, Swiber and China Fish. Those were also flagged out some time back but it took a while to sink in. Now, I am more open to criticism as long as it's constructive.


cif5000 said...

I am not saying that KC is bad. It is just that as there are more change factors to think about. Unlike selling $50m worth of kalipok, the business has more uncertainty. Nevertheless, I don't think it will lose (lots of) money. Just that the price paid has to take into consideration of the long term scenarios, if you intend to hold it long term. It could be very promising, but certainly not certain. Therefore, price is critical when getting into this stock.

Musicwhiz said...

Hi cif5000,

Yes, you are right on that. I think I purchased at fair value, not exactly cheaply I must admit.

But I am confident of the long-term prospects, and encouraged by the fact that it has little debt and has a good track record and customer base.

Once again, thanks so much for your feedback!


donmihaihai said...


Thank you. I breathe better now.


I will write one last post on this.

KC expanding margins and raising ROE over the last few years may not be increasing moat. These are happening to many industries except to those industries that din enjoy the ride because they are hit by raw materials cost. The trend is obvious when putting them side by side. To say KC has moats, KC must be doing it at the expense of it competitors both on the upturn and downturn. Also, it is those superb returns for last 2 to 3 years that will draws new competitors.

Rather than niche, KC operate in a sub-industry of say A&P(or marketing)where many huge firms are operating. They will love to step in if the return look so good and can easily presenting themselves as integrated service provider handling everything for their clients.

With their reputation and resources, they can hire top peoples with top pays. Managing the whole event but sub-out the actual fitting, etc to sub-contractors, any players. If this happened, KC will earn sub-contractor margins or even worse unless KC can stand up and fight on the same level.

You need to know more than just MICE to say for sure that this will not happen.

donmihaihai said...

After going thru it again, it may not happen or on big scale basis because of competition between brands, companies of the same industry

Musicwhiz said...

Thanks Donmihaihai,

I note that you've researched this industry in a very in-depth way as well. Appreciate the comments.

Well, you and cif5000 may be right about the industry. In that case, Kingsmen may have an illusory moat and I will then suffer a permanent loss of capital. But I hope at least I would have learnt something by then.


donmihaihai said...

>>In that case, Kingsmen may have an illusory moat and I will then suffer a permanent loss of capital.<<

Which company are you working in? Does your company has a big moat? If not you better look for a new job because your company is going to crash by competitors.

No moat = loss. What about price?

In-depth? I have not look at KC, and this industry. 15 mins is the most I took before writing the 1st comment.

I won't be writing this comment(after my said last comment) if my blood isn't boiling.

Musicwhiz said...

Hi Donmihaihai,

I didn't know your blood was boiling. Sorry if what I had said offended you, but I think it was unintentional.

Actually, I am not sure why you are angry. If I had offended in any way, I apologize.


cif5000 said...

I think if we looked outside the mice industry, we can compare KC with Inter-Roller and ARA. We know what happened to IR (now Pteris). I loved IR until it became too obvious. High ROE, high level of expertise needed, low capex, booming industry. Unfortunately, they have to bid for one-off deals and then scrap the customers for loose-change maintenance contracts. ARA. Along the same line, low capex, high ROE, human capital business, booming industry. But they have good bloodline.

IR was good but their visibility has been no longer than 1-2 year. So unless one get it at PE of 2 net of asset, one is not being conservative. ARA has a longer visibility. The management contracts are worth a number of years and that might not changed so easily (think MacArthur Cook). So in a way, the visibility is farther. And the market is more "unlimited". Of course in both cases, I am valuing it at going concern.

If I split KC into 2 segments: Store Fitting and Event/Exhibition, then Event is the one that should be something that moat can be built around. Like I said previously, Reno contractors and ID are just what make the store fitting. I would further look at the events that are repeated by KC. Because when you get an event, you get to fit out the entire show and that can be recurring if the event is an annual one. Unless they screw up the show. The event manager can squeeze the money out of the participants while keeping the organizer happy. So there is a recurring income that we can use to base our most conservative estimate, and get our valuation. Definitely not mere extrapolation unless you are a brokering house analyst.

That's all I more "insights" or thoughts.

Musicwhiz said...

Hi cif5000,

Interesting views on Inter-Roller (Pteris Global), may I check if you used to own it or if you still have shares in the Company? Somehow I didn't view Pteris as low capex and high barriers to entry, plus I also did not glance at its Balance Sheet and Cash Flow Statement closely from 2006 till present. My view is that the dynamics of the industry are somewhat different from Kingsmen, as airport conveyor belts systems are only installed once in new airports and there is very little "recurrent" business. Thus, Pteris has to leverage on new airports opening or revamping of existing airports for its business.

I don't know much abour ARA, so I cannot comment. But perhaps since they are into property the competitive moat is not that deep? Unsure about them though.

Just to check - what do you mean by "bloodline"?

The point you mentioned about visibility is true - Pteris did not have much long-tern business in terms of airports because their contracts were quite "ad-hoc" and depended on infrastructure spending by Governments. I think most companies will be valued based on going concern, and not exit price basis (i.e. liquidation value).

Correct on the Events part, which is basically the bulk of their business and the one with the most potential to scale up. Thought I concur that several players are present for the fitting out, it's the designs which win out in the end and that's the human effort involved. I am of course hoping their expertise and experience in thematic nets them some good contracts in Asia for theme parks - just keeping my fingers crossed on this haha.

Thanks again for the insights!