Saturday, August 14, 2010

Sun Tzu - War On Business Part 11 (Ultizen Games)

Episode 11 of this highly successful series brings James Sun back to China, Shanghai. In this episode, he meets up with entrepreneur Lan Hai Wen, who heads a video-gaming company called Ultizen Games. Ultizen is in charge of producing and marketing games for adults and children, but the Company recently was awarded a contract (thanks to the CEO’s networks and contacts) to produce and develop a children’s game, for the Chinese mass market. As can be imagined, the potential is huge as China has a very large child population, and if the game takes off it could elevate Ultizen to a whole new level.

However, as with all businesses, it is prudent to check out the competition first. The video gaming industry is large and fragmented and there are many companies which are muscling in to grab a piece of the lucrative pie. Ultizen is purportedly one of the larger gaming companies in Shanghai, but it is difficult to grab the leadership position as people’s tastes keep changing and the industry has to continually churn out new games and software to keep consumers interested. There is also not much product and brand differentiation as people usually just buy the game without bothering much about the company behind it (as well as the legions of developers who helped produce it). I can safely say this because I used to be a gamer too, and seriously I cared more about the content and graphics than the actual gaming company (OK, maybe except Blizzard which produced Diablo II)!

James checks out the Ultizen office where the programmers, software engineers and developers are busy at work. Most of them reported experiencing quite a bit of stress as this was Ultizen’s first major project and everyone as under pressure to deliver an excellent product on time. Some of the staff also complained of not having enough guidance to work on a child’s game and some had no clue as to where or how to begin. Ultizen made the software engineers watch hours and hours of Chinese cartoons to better understand what children look for in a computer game, but James finds it strange that no children were consulted or interviews done with kids during the game development phase. Hai Wen mentions that this would not be feasible as the game was targeted at children, and so had to be worked on by adults. James looks rather sceptical when he hears this.

Eventually, James again enlists the help of Cha Li, who together with James advises Hai Wen in the War Room to enlist the assistance of kids in a focus-group interview setting to enable the software engineers and developers to understand better what children look for in a game. Hai Wen agrees to this as he finally begins to understand that one needs to involve the consumer if one is to be successful in developing something FOR them. By going through several iterations without involving children, the developers were essentially groping around in the dark, and it was a case of the blind leading the blind as even those watching the cartoons could not fully comprehend what the final consumer would find appealing or enticing.

Finally, a batch of kids are selected to take part in a “controlled” focus-group study, but chaos soon reigns as the kids are excited and hard to control! Most of them do give feedback on the game designs, characters and other aspects of what the developers had come up with thus far, but all this information had to be carefully sieved through and collated and made sense of later. Still, it turned out to be an eye-opener for Ultizen’s team who managed to incorporate the new insights into their design and enhanced their final product.

There are interesting lessons to be learnt from this episode:-

1) Involve feedback from the consumer when developing a new product – This also applies to any product which involves repeated usage or even food products. If possible, do blind testing or conduct interviews with the intended target consumer segment to garner feedback and/or opinions. Pay a fee or give away some freebies if need be, but such money is usually well-spent as he feedback can be invaluable.

2) Use Focus-Group Interviews – Focus groups are very effective for getting feedback on a product or service to be launched, and it also has a captive audience who can give constant information. However, that said, such interviews should be properly structured and organized to maximize the utility, otherwise it would be a waste of everyone’s time and resources.

3) Be aware of staff welfare – I noted in the episode that not much was done to alleviate the staff’s stress and concerns about the project deadline and the difficulties encountered. More could have been done to ease the frazzled state of mind and calm nerves. Staff turnover could result if this aspect is not managed properly.

4) Channel resources productively – In the episode, the team at Ultizen were told to watch many hours of Chinese cartoons, which did not assist much in the creative process as the developers had no inkling of what the final consumer would have wanted. Therefore, it is important to prioritise resources and ensure time is not wasted on such activities which generate no value-added to the organization. For example, the team could have been tasked to find out more about the children’s gaming industry in other countries instead (to get a more holistic view).


Overall, the episode explored a very interesting industry, gaming, in which I myself have experience and intimate knowledge of. It was interesting to note how designers and developers went about creating a game, and how they factored in many inputs and tweaked the images to obtain the final product. Of course, a lot of extensive beta testing is also involved and the whole process can be mind-numbingly tedious! But as an ex-gamer, I can appreciate the hard work put in by these people. My previous favourite games used to be Heroes of Might and Magic III as well as Diablo II. I am currently sporadically playing Heroes of Might and Magic V......oh well it's a lifelong "addiction"!

For the next episode (incidentally, the second-last), James is back in China again (Suzhou this time) and will meet up with Yvonne Huang, who runs a company called Diploma dealing with food and laundry outsourcing services.

Check out the website for Ultizen Games over here:-
http://www.ultizen.com/about.asp?id=1&langs=3

11 comments:

Chin Yee Hong said...

That's a very detailed article. Btw, do you know of any other forums similiar to Afralug?

Musicwhiz said...

Hi Chin Yee Hong,

Thanks; sadly I do not know of any forum similar to Afralug. Afralug was really the ONLY value investing forum - they aren't exactly very popular haha!

Cheers,
Musicwhiz

Chin Yee Hong said...

I think a good forum like a good company, is a rare breed indeed.

Musicwhiz said...

Hi Chin Yee Hong,

Yes I do agree on that. Sadly, there probably will not be another such forum for some time to come.

Regards,
Musicwhiz

Chin Yee Hong said...

We need to meet up somewhere online to bounce stock ideas off each other. I think it won't be nice to hijack your blog for that purpose. lol

The forum at Nextinsight looks quite promising.

Musicwhiz said...

Hi Chin Yee Hong,

You can always email me at musicwhiz55@gmail.com for a discussion on companies and value investing. I'd be happy to talk about it, though I can be pretty serious sometimes! :P

I think NextInsight still has some ways to go as there are still many traders and speculators there.

Regards,
Musicwhiz

Drizzt said...

whats a good medium for discussion. you will realise alot of us bloggers do visit each others blogs but i dun think it its possible to set up a value investing forum as it takes too much away from generating good content for our blogs.

Musicwhiz said...

Hi Drizzt,

Haha you've got a good point! Still, I did enjoy the sharing at Afralug, notwithstanding the fact that it "drove" traffic away from value investing blogs.

Cheers,
Musicwhiz

Akatsuki said...

Hi Mw, this are some private sharing with my friends with dealings with XXX. Im sure you will figure it out. You bought at less than $0.30 Have a look.

"I have dealings with some members of XXXX. In fact, they make trips couple of times to my company and I have interacted with them on a casual basis, which is very important. To me, this is the time where they are not in the "AGM" mode and tend to reveal more details than usual. I have some first hand info to share with you guys! :)

One senior management from the company, whom I decline to name, had adviced me not to purchase the shares of XXX. This individual felt that despite the many years in which he has been in, there is literally no room for capital appreciation. Dividends have been steady throughout these years (according to him, but i have yet to verify)

I happen to be in the oil and gas industry. I work for the largest oil firm in the world and we do give XXX long term contracts, where we have awarded them contracts for the past 10 years, or more. They supply us with hoses, rubber and composite ones.

I have not read the annual report as yet because of my interaction with them, and also my observations of their products. This is a company I would not invest in. Do exercise independant thinking!

1) Their hoses - decent quality, but they get it from a source in USA. Just google it, it should be pretty obvious. They would procure the hoses from them, and sell them to companies like mine. Lead time, it would take 3-6 months for the hoses to reach us.

Do they have a moat? The answer is No. Any company can come in and do the same thing, right? In fact, my company is actively looking for new sources, and if that happens, they lose a chunk of their business. Note again, I am working for one of the oil majors, ie their major client. Insider news --> there are other alternatives other than GRP.

2) Durability of hoses - there are 2 types of hoses, for different services, ie crude oil, diesel, LPG, Mogas, or chemicals like JP4. In general, my company only changes hose when the hoses expires. The expiry date come on a certificate and should last us a few years (i need to check with the exact number of years on the cert). However, most of the time, many companies used the hose till it cant be used, meaning until the hose ruptures, we'll use it. That could amount to even to 10 to 15 years.

What does it say? It means companies like us, we only deal with them once every few years, OR when our hoses rupture. Ask yourself this, would you want a company whereby the products are being sold to companies "slowly"? One reason why we decide not to deal with them is because it would take some time for them to deliver the hoses from USA. They are like a middlesman, for hoses.

Secondly, do they have inventory? Not much, they have some in their warehouses, but hoses have different diameters, from 6 inches to as many diameters as possible. My experience tells me when we want a hose from them in the soonest moments, they cant deliver. AND XXX tries to minmize the hoses stored in their warehouse. The reason is because, if these hoses are stored too long, the hoses will age and companies like us will not want to accept. For instance, if GRP store the hoses for 3 years, and want to sell it to me, I have the right to say "NO" and they have to look for new hoses elsewhere. Note: Imagine storing rubber materials in a warehouse for 3 years, imagine the condition after you take them out, would customers buy them?

3) Management. Not impressed. It is a known fact in my company that they are a little secretive in some areas. I shall not elaborate as there are alot of engineering fundamentals involved. In short, when we asked for some documentation from them, they are not very spontaneous. Everyone in my department knows about this, and we dun like it, honestly. Which is why we are looking at alternatives"
This statement might not be true, it just based on one person's opinon.

Musicwhiz said...

Hi Akatsuki!

Very pleased with your independent views and your objective evidence for GRP which you have typed here. In fact, I'd say this is really good info for any investor.

However, I must admit that their consistency of revenues sort of contradicts what you mentioned about GRP, i.e. they are just being a middleman and anyone can do this; and also the fact that they only supply hoses every couple of years and not consistently. The average 8-year revenues is around S$27.6 million and has not fluctuated much since FY 2002. In particular, Hoses and Marine segment has shown very consistent segmental revenues of about S$10 million per year since FY 2006 through FY 2009. Gross margin for this segment is also very high at round 50%, while net margins hover at around 36% over the last 3 years.

From the data itself (i.e. the numbers), I fail to see how GRP does not have some form of competitive advantage which allows them to garner a 50% gross margin. If, as you say, the hoses are common and any supplier can supply them, then GRP would have to lower the prices drastically to compete with its competitors. Revenues would be eroded and so will gross margins; but instead this has shown to be very consistent over the years.

Your company could be one of their customers, but they do have other customers who may have more extensive need for their Hoses; and replacement of hoses for these companies could also be a lot faster. What I am saying is that the numbers tell me something different from what you have narrated. I do acknowledge independent thinking, but then again I use numbers to tell the story! :P

If I look to cash flows, GRP has consistent FCF every year for the last 8 years, and they have been paying regular dividends since FY 2005 (their Balance Sheet was ungeared in FY 2007). Their latest current ratio stands at 5.77 as at December 31, 2009; so there is a high chance of them continuing with their dividend payout as they are accumulating huge chunks of cash.

I must admit I am not an industry expert on hoses and I do not know the operational and inventory aspects of hoses; but there must be something about GRP's hoses to make them saleable over the last 8 years? I don't know what it is honestly but I can deduce that from the numbers.

As for your comment on Management, I don't quite catch your drift but you seem to imply they are secretive and not open.

Just curious though - has your company found alternatives? Are these alternatives as good as what GRP is offering, in terms of quality, quantity and pricing? If alternatives are so readily available as you have claimed, why does your company need to look for them? It would be as easy as approaching say Company ABC and asking for a quotation; thereby leaving GRP in the dust.

Hope you can explain the above. I am simply using numbers to support the basis of my argument; no offense intended.

Cheers,
Musicwhiz

Akatsuki said...

Hi Mz, i don;t work for any company. Still studying, just letting you know some the comments out there. =]

Cheers