Clearly, the title above may elicit some gasps of astonishment and surprise amongst readers, as the thought may not have crossed their minds that this is a “bull market”. However, during the last few months, it has become more noticeable that share prices have, in general, been moving upwards. Despite the gloomy and often depressing news, there were also bits and pieces of positive “green shoots” peppered in between which would make one smile and feel optimistic. Overall, the feeling is one of general caution and most investors would feel some measure of trepidation and would hesitate before jumping in. Or perhaps I am wrong? If one observes the recent Top 30 volume, one will notice that they are mostly made up of penny stocks, and these are businesses which frequently need to raise cash and are at most worth a punt. However, they continue to dominate the Top 30 Volumes listing with a very high churn rate, and supposedly are being traded in large volumes by large institutional players and small-time retail speculators.
This all sounds well and good, or does it? The general sentiment is that things will begin to improve, but how does that factor into our analysis of the businesses we hold? In order to answer that, one must constantly and consistently take a close look at the business to ensure everything is proceeding as planned, and that the numbers still look respectable. There have been many cases of “buy and forget”, which have resulted in an initial investment dwindling to 10% or less of its value (and in worst-case scenarios, the company goes bust and the investor loses everything). If one has taken a close hard look and is assured that all is well, the next question to ask would be – should I continue to add to my position at current valuations or should one adopt a “wait and see” attitude? Clearly, there is no definitive answer to this million-dollar question, and one must use one’s professional judgement as well as experience in reviewing business affairs to make an informed decision.
All is made much more difficult in the case of a bull market, where “a rising tide lifts all boats”. In the last 2-3 months, it has been observed that valuations had risen steadily as economic conditions reverted closer to the long-term average, and when a strong rebound in the economy and growth was anticipated. On April 14, 2010, the STI finally crossed the 3,000 psychologically important mark, its highest level since June 2008. An investor has to do double work in such cases – firstly to ascertain if business conditions are indeed improving and will positively affect the business in which he is invested in, and secondly to determine if valuations are still fair or excessive (they can’t be “low” because the bear market has long passed us). This may be one of the most “objective” methods I can suggest to review and see if it makes prudent sense to continue investing, or to hold and wait; as other methods may hinge too much on price levels and general sentiment and be unable to stand up to close scrutiny when called for. However, this method is far from simple and requires quite a bit of research, reading and delving into numbers, as well as the use of assumptions. Let me elaborate a little more.
The first step an investor has to take to distinguish between a bull market and brains is to assess the business climate affecting the company in question, and to determine if it has indeed improved or remains subdued or in the doldrums. For example, if you are invested in a high-end watch retailer (e.g. Hour Glass, Cortina), you could check out news articles on consumption spending of luxury items, and also how the industry as a whole is faring (e.g. are competitors expanding or lying low for now). Next is to examine the business model and numbers belonging to the company you are invested in and to sieve out any plans or intentions they may have to expand or grow. For example, a mass market food retailer may start expanding a chain of food courts because the middle class pool has grown larger in a developing nation, or a property company decides to go ahead with property launches as compared to 6 months ago when they laid low. All these signs point to heightened economic activity pertaining to the company you are scrutinizing, and these signs, coupled with a strong Management Team, usually indicate decent growth ahead in top line and perhaps bottom line as well. Cost control is another aspect one can assess, and this is by observing the quarterly gross margins which a firm enjoys. A recent example I can think of are Swiber and Ezra, whose gross margins seem to be shrinking even though oil prices seem to be rising. This either portends weaker rates, higher costs or more competition. Either way, one has to take note of all these and factor them in accordingly in order to make an informed judgment call.
The paragraph above briefly describes how to assess a company and weigh its fundamentals and prospects, and also to observe how it executes its plans. Track record also counts a lot when assessing companies, as some relatively new companies may have Management which are inexperienced and who have not gone through crises. Finally, a conservatively financed company with a strong Balance Sheet and consistent free cash flows also has a better chance to grow strongly once the economy bounces back, and there is even a chance of them increasing their dividends (which would count as a bonus) if revenue and earnings are lifted.
The second part is, admittedly, a lot more difficult to assess, and involves reviewing the current and expected future valuation of the Company to ascertain if it is still a bargain, or if it may exhibit signs of being over-valued. The difficulty here is one of future expectations, uncertainty over earnings (which is always the case) and most importantly, what is deemed to be “reasonable” in terms of valuations. If we take the first two items aside because we are not astrologers and cannot predict the future, that leaves us with the definition of “reasonableness” when it comes to valuations. Recall that during the brutal bear market, valuations of 1-2x PER and 0.4-0.5x P/B were extremely common, and many companies traded lower than their NAV. By contrast, bull market valuations (to take a leaf from late 2007) average anything from 15x to 30x for extreme cases. Thus, the long-term average is probably somewhere around 7-12x, and many pundits have stated that the index is fairly valued at about 13-15x PER. If we also account for the fact that we are in the midst of a slow recovery from a brutal recession (the worst since the Great Depression, apparently), then valuations should begin to normalize and a region of around 5-8x would be deemed reasonable.
By no means should readers take this as the gospel truth, as there is no way to determine what stage of the market we are in at any one point, and in fact it is always hindsight which tells us if a company was under or over-valued. Therefore, the conclusion is that even if one were to expect decent growth (not explosive), one should ensure a margin of safety by not purchasing a company whose historical PER exceeds 10x, and whose earnings growth rate averages 10-20% in the long-term. Since valuations are a tricky business, it is entirely up the individual investor to comfort himself that a margin of safety exists in his purchase based on all facts present, and he has to ensure he has covered a broad enough spectrum of variables to give himself the confidence to purchase a stake in the company for the long-term.
To end this article, to differentiate between a bull market and brains, all one needs to do is to analyze and focus on the business, and ignore the stock price unless it becomes so painfully obvious that we are in a runaway bull market and that valuations are unsustainably high; then it may make more sense to sell to Mr. Market!
Monday, April 19, 2010
Thursday, April 15, 2010
Kingsmen Creatives – Analysis of Purchase Part 3
In Part 3, I shall elaborate on the Competitor analysis for Kingsmen, which is a section I devote to understanding the competitive forces present which may affect Kingsmen’s business, and to evaluate the threat of scaling their competitive moat. Simple and brief write-ups will be provided on three of Kingsmen’s competitors. I will then touch on prospects and plans which the Company has in store to grow further, and finally wrap up with my decision for purchasing shares in the Company (weighing pros against cons).
Competitive Analysis
Pico Far East (“Pico”) is the market leader in the MICE industry and also does fitting out for reputable clients. Essentially, they have been in this business for as long as, if not longer, than Kingsmen Creatives. Pico is Hong-Kong based and listed on the Stock Exchange of Hong Kong, and as mentioned earlier most of its business is centred in Hong Kong and China, though it has a pan-Asian presence in many countries as well. More information can be found on its website.
More importantly, I used Pico as a benchmark for comparing Kingsmen as they are the certified market leader. Metrics such as revenue growth, gross and net margins were compared and I also looked at the list of clients which Pico had and some of the events which they were helping to organize. That was when I got surprised – there were overlaps in the event management arena (e.g. for Formula 1 Singapore) for both Pico and Kingsmen, which made me realize a mega-event could be so massive in scale that all players get a slice of the “action”.
In terms of financials, Pico had far higher revenues than Kingsmen (I used financials for half-year ended April 30, 2009), but net margins were slightly lower. Revenue was HK$1.05 billion (about S$210 million) for 6 months, thus annualising this would mean revenues of about S$420 million for full-year, about double that of Kingsmen. Gross margin for Pico was 33.7% against Kingsmen’s gross margin of just 26.4%, so it was obvious that Kingsmen had more room to go in managing their COGS (much of this depends on scale). However, Pico’s net margin was just 5.75%, while Kingsmen had a net margin of 5.9% for 9M 2009 and 7.4% for FY 2008. Even though Pico appears to have much higher gross margin, Kingsmen had better expense control and still managed to stay on par with the market leader. This is a comfort of sorts as it shows that Kingsmen did not fall behind Pico on too many aspects.
Design Studio is a premier furniture manufacturer, and the company also provides interior fitting out specialist outside Singapore. Design Studio's three complementary and versatile core businesses - the supply and installation of manufactured furniture products to private residential developments, interior fitting-out services to hospitality and commercial projects outside Singapore, Malaysia, Thailand, Vietnam and Indonesia, and distributorship of renowned imported brands (in Singapore only) and the export of two widely received in-house brands have been customised to reach a comprehensive spectrum of residential and commercial developments across major countries around the world. More information can be found on its website.
Suffice to say that Design Studio is starting to be a credible competitor to Kingsmen in the Fitting Out aspect, even though the Company was only started in 1991 (about 19 years of history). However, the difference ends there. Design Studio are more of a furniture manufacturer and they tie up with prestigious property developments (e.g. high-end condominiums) to provide quality furnishings; so the Company actually has a manufacturing plant and houses inventory, unlike Kingsmen which are purely service-based and rely more on human expertise. This is also why Design Studio has a much higher net margin that Kingsmen (at close to 20%). On the flip side, its working capital requirements are much higher due to the fact that they need to manufacture and stock up, and well as handle logistics and transportation of their finished goods.
I could not do a direct comparison between Kingsmen and Design Studio as the core nature of the businesses are different, even though people have lumped them together on many occasions as “comparatives”. Design Studio actually competes with other furniture manufacturers like HTL, Lorenzo and Sitra while Kingsmen’s direct competitor is more Pico.
Cityneon is a company which deals with exhibitions, events and fitting out, though it is a much smaller competitor to Kingsmen. Its annual revenues for FY 2009 stood at about S$90 million compared to Kingsmen’s S$242 million for FY 2009. It also has large clients for fitting out such as Asia Jewellers’ Boutique, YKK showroom and K4 Retail Superstore, among others. Along with Kingsmen, they are also providing services at the upcoming Shanghai Expo 2010. This is another example of overlaps in the events, which require more than one event management company to assist in.
The conclusion is that Pico and Cityneon seem to be targeting the same space as Kingsmen, but the overlap demonstrates that there are ample opportunities for all players to work on these mega-projects. While all players have a strong clientele base and international clients as well, Kingsmen can hold its own with its own client base. Competition will continue to be keen but with the growth of the industry and many more major upcoming projects, there is still room for growth in top line and bottom line for all the players. However, as a prudent measure, I will be closely watching the margins for Kingsmen as well as their order book to ascertain that all is going well.
Prospects and Plans
Kingsmen also has experience in thematic and scenic construction, from its experience with the Universal Studios Theme Park. This enables it to enter a new business segment within its Museums and Exhibitions division, and start to bid for theme parks in South-East Asia. Universal Studios also recently announced, on Jan 19, 2010, that they plan to build its largest theme park in South East Asia in South Korea at a cost of S$3.7 billion. There are also plans by China and the Middle East to build theme parks in the next couple of years, and these present opportunities for Kingsmen to grow their business.
In the meantime, they will continue to grow their order book with iconic events in the MICE space within Singapore and South-East Asia, and are continually attracting more international clients for their fitting out contracts.
The second phase of Universal Studios is also up for grabs, and Kingsmen are confident they can secure contracts for this. Most of the rides and structures also need maintaining and refurbishment over the next few years, which will provide Kingsmen with steady business.
Conclusion and Wrap-Up
The purchase decision was made based on the following points which are summarized below (negative points will be separately elaborated on):-
1) Track Record and Reputation – Kingsmen has been around for nearly 34 years, and has built up a solid track record of providing quality work done and professional services with its trained and experienced staff. Because of this, the Company has a stellar reputation and is known as one of the leaders in providing fitting out and organizing exhibitions.
2) Brand Recognition and Visibility – Kingsmen has a recognizable brand name and brand equity, and they are effectively leveraging on this to grow their business. Their focus on quality and high standards also means that they can easily attract international brands and big names to sign up with them.
3) Strong Management with years of experience – To be frank, this reason is always stated as a reason to invest on many listed company’s fact sheets. But let me just reiterate once more that Benedict Soh and Simon Ong (who were the founders) have a wealth of experience in managing the business and have built it up literally from scratch to where it is today. OK, end of cliché, let’s move on to the next point.
4) International Clientele – Kingsmen has a myriad of international clients such as The Gap, Burberry, Swarovski and others; and the good thing is that many of these are repeat customers, which means their customer base is strong and also growing. The presence of big name clients also mitigates the risk of bad debts, which are an important aspect of this business as most of the time the event has to be organized and over before clients pay up (though of course, they have to pay an upfront deposit first).
5) Economies of Scale provide barriers to entry – Some may argue that it is easy to organize such events and hire sub-contractors to set up the tentage or to do fitting out. This is true, and I do know of smaller companies who cater to the smaller scale road shows (of generic products or smaller brands). However, costs are always an uphill battle as there are no economies of scale or pricing power; so the smaller players are always struggling to contain costs and their profit margins are even lower than Kingsmen (assuming they even manage to break even, as it is a cutthroat business when you are a small player). Thus, Kingsmen’s scale gives them an advantage in terms of being able to bid for large projects with better revenues and margins, and to manage their costs better through economies of scale. This also acts as a barrier to entry as it is not easy for a small player to get larger because of existing business relationships between Kingsmen (as well as other large players like Pico) and international clients.
6) Low Working Capital Requirements – Kingsmen is essentially a service-based company and has no inventory, so this eliminates the risk of over-production and/or product obsolescence. As a result, it also has low working capital requirements as most of its expertise lies in its staff’s skills and service levels. Though staff costs are a large component of its cost structure, this is essentially a fixed costs except when using sub-contractors. This is the reason why the business requires little additional investment to scale up to other countries and it can continue to generate FCF every financial year.
7) Steady and increasing dividends – From the chart in Part 1 of this analysis, it can be seen that dividends are increasing every year since Kingsmen started paying an interim dividend, and this can be attributed to its business model which generates good FCF which it can pay out to shareholders twice a year. As the business is growing due to scaling up of competencies and capabilities, it looks like the dividend can at least be sustained. Assuming a yearly dividend of 3 cents per share (conservative), based on my purchase price of 56.5 cents, this represents a dividend yield of 5.3%.
As with any business, below are the negative aspects of Kingsmen which I have to list down as well, in order to make an informed decision:-
1) Low Margin Business – As a result of the nature of the business, net margins in this industry are generally low at 6-8%, and seldom exceed 10%. Low margin businesses are more vulnerable to “shocks” when expenses suddenly increase without warning, and a Company can fall into losses more easily if it does not practice good expense control. The good news is that the business is not exposed to commodity prices (raw materials), and also does not have financing costs as it is in a net cash position. This mitigates the risk somewhat.
2) Order-Book Driven Business – Kingsmen’s business is essentially order-book driven, and this has risks pertaining to % of completion of projects as well as ability to continually garner contracts/projects to ensure a steady revenue stream. Revenues and costs may also be “lumpy” due to the timing of recognition and progress billings.
3) Staff Costs are a major component of Kingsmen’s business model – As staff costs make up a large percentage of their total costs, Kingsmen are vulnerable to any economic or social policies implemented by Singapore which has a negative impact of staff costs, both in terms of welfare and benefits. For example, the Government recently announced hikes in Foreign Workers Levy (FWL), but it is not known if Kingsmen has a large proportion of foreign workers, so the impact of this measure should be muted.
4) Expertise and Experience is inherent in staff – Much of the expertise and skills which drive the business are inherent and internalized within staff and do not count as an asset on the Balance Sheet. This brings up the risk of key staff resigning or being “poached” by competitors, thereby taking with them valuable information and/or skill sets which Kingsmen may have painstakingly spent money to inculcate and develop. What the Company can do is to initiate a “buddy” system in which two staff have overlapping roles, to minimize the risk of a “vacuum” being left behind in case one suddenly resigns or falls ill.
5) Reliance on Sub-Contractors – Due to Kingsmen’s high reliance on contractors and sub-contractors, an increase in costs of materials will flow through to contractors and in turn, affect the margins Kingsmen enjoys through provision of services. Contractors may also have the upper hand in dictating prices to charge Kingsmen as Kingsmen may be highly reliant on them; this risk can be somewhat mitigated if Kingsmen uses more than one sub-contractor for a single event or fitting out.
6) Business is not recession-proof – Kingsmen’s business is NOT recession-proof, unlike industries like food and clothing which are considered necessities even in the event of a sharp downturn. Businesses will scale back on renovations and refurbishments during recessions and this will directly impact Kingsmen’s top line; for MICE industry, less exhibitions and trade shows will be held too if countries struggle to grapple with the effects of a prolonged recession.
From the above, it can be seen that the negative aspects are almost as numerous as the positive ones, which means a higher margin of safety is required. I have invested based on conservative price-earnings assumptions, low to zero growth and a constant (and perhaps decreasing) dividend payout. The economic recovery is not a given and many obstacles still abound, so being conservative means I still get to enjoy decent yield with no upside expectations. Therefore, I am unlikely to feel too disappointed and any upside in terms of earnings and valuation adjustments will represent a bonus. In the meantime, I will continue to keep a close watch on the Company's business, financials, industry and fundamentals.
Disclaimer: This 3-part analysis is not meant to be a guide or solicitation for readers to either purchase or sell shares in Kingsmen Creatives. It is merely meant to be a diary of my thought process when evaluating a Company for potential investment. Please do your own research and consult a trained professional if you are unsure of what to do.
Competitive Analysis
Pico Far East (“Pico”) is the market leader in the MICE industry and also does fitting out for reputable clients. Essentially, they have been in this business for as long as, if not longer, than Kingsmen Creatives. Pico is Hong-Kong based and listed on the Stock Exchange of Hong Kong, and as mentioned earlier most of its business is centred in Hong Kong and China, though it has a pan-Asian presence in many countries as well. More information can be found on its website.
More importantly, I used Pico as a benchmark for comparing Kingsmen as they are the certified market leader. Metrics such as revenue growth, gross and net margins were compared and I also looked at the list of clients which Pico had and some of the events which they were helping to organize. That was when I got surprised – there were overlaps in the event management arena (e.g. for Formula 1 Singapore) for both Pico and Kingsmen, which made me realize a mega-event could be so massive in scale that all players get a slice of the “action”.
In terms of financials, Pico had far higher revenues than Kingsmen (I used financials for half-year ended April 30, 2009), but net margins were slightly lower. Revenue was HK$1.05 billion (about S$210 million) for 6 months, thus annualising this would mean revenues of about S$420 million for full-year, about double that of Kingsmen. Gross margin for Pico was 33.7% against Kingsmen’s gross margin of just 26.4%, so it was obvious that Kingsmen had more room to go in managing their COGS (much of this depends on scale). However, Pico’s net margin was just 5.75%, while Kingsmen had a net margin of 5.9% for 9M 2009 and 7.4% for FY 2008. Even though Pico appears to have much higher gross margin, Kingsmen had better expense control and still managed to stay on par with the market leader. This is a comfort of sorts as it shows that Kingsmen did not fall behind Pico on too many aspects.
Design Studio is a premier furniture manufacturer, and the company also provides interior fitting out specialist outside Singapore. Design Studio's three complementary and versatile core businesses - the supply and installation of manufactured furniture products to private residential developments, interior fitting-out services to hospitality and commercial projects outside Singapore, Malaysia, Thailand, Vietnam and Indonesia, and distributorship of renowned imported brands (in Singapore only) and the export of two widely received in-house brands have been customised to reach a comprehensive spectrum of residential and commercial developments across major countries around the world. More information can be found on its website.
Suffice to say that Design Studio is starting to be a credible competitor to Kingsmen in the Fitting Out aspect, even though the Company was only started in 1991 (about 19 years of history). However, the difference ends there. Design Studio are more of a furniture manufacturer and they tie up with prestigious property developments (e.g. high-end condominiums) to provide quality furnishings; so the Company actually has a manufacturing plant and houses inventory, unlike Kingsmen which are purely service-based and rely more on human expertise. This is also why Design Studio has a much higher net margin that Kingsmen (at close to 20%). On the flip side, its working capital requirements are much higher due to the fact that they need to manufacture and stock up, and well as handle logistics and transportation of their finished goods.
I could not do a direct comparison between Kingsmen and Design Studio as the core nature of the businesses are different, even though people have lumped them together on many occasions as “comparatives”. Design Studio actually competes with other furniture manufacturers like HTL, Lorenzo and Sitra while Kingsmen’s direct competitor is more Pico.
Cityneon is a company which deals with exhibitions, events and fitting out, though it is a much smaller competitor to Kingsmen. Its annual revenues for FY 2009 stood at about S$90 million compared to Kingsmen’s S$242 million for FY 2009. It also has large clients for fitting out such as Asia Jewellers’ Boutique, YKK showroom and K4 Retail Superstore, among others. Along with Kingsmen, they are also providing services at the upcoming Shanghai Expo 2010. This is another example of overlaps in the events, which require more than one event management company to assist in.
The conclusion is that Pico and Cityneon seem to be targeting the same space as Kingsmen, but the overlap demonstrates that there are ample opportunities for all players to work on these mega-projects. While all players have a strong clientele base and international clients as well, Kingsmen can hold its own with its own client base. Competition will continue to be keen but with the growth of the industry and many more major upcoming projects, there is still room for growth in top line and bottom line for all the players. However, as a prudent measure, I will be closely watching the margins for Kingsmen as well as their order book to ascertain that all is going well.
Prospects and Plans
Kingsmen also has experience in thematic and scenic construction, from its experience with the Universal Studios Theme Park. This enables it to enter a new business segment within its Museums and Exhibitions division, and start to bid for theme parks in South-East Asia. Universal Studios also recently announced, on Jan 19, 2010, that they plan to build its largest theme park in South East Asia in South Korea at a cost of S$3.7 billion. There are also plans by China and the Middle East to build theme parks in the next couple of years, and these present opportunities for Kingsmen to grow their business.
In the meantime, they will continue to grow their order book with iconic events in the MICE space within Singapore and South-East Asia, and are continually attracting more international clients for their fitting out contracts.
The second phase of Universal Studios is also up for grabs, and Kingsmen are confident they can secure contracts for this. Most of the rides and structures also need maintaining and refurbishment over the next few years, which will provide Kingsmen with steady business.
Conclusion and Wrap-Up
The purchase decision was made based on the following points which are summarized below (negative points will be separately elaborated on):-
1) Track Record and Reputation – Kingsmen has been around for nearly 34 years, and has built up a solid track record of providing quality work done and professional services with its trained and experienced staff. Because of this, the Company has a stellar reputation and is known as one of the leaders in providing fitting out and organizing exhibitions.
2) Brand Recognition and Visibility – Kingsmen has a recognizable brand name and brand equity, and they are effectively leveraging on this to grow their business. Their focus on quality and high standards also means that they can easily attract international brands and big names to sign up with them.
3) Strong Management with years of experience – To be frank, this reason is always stated as a reason to invest on many listed company’s fact sheets. But let me just reiterate once more that Benedict Soh and Simon Ong (who were the founders) have a wealth of experience in managing the business and have built it up literally from scratch to where it is today. OK, end of cliché, let’s move on to the next point.
4) International Clientele – Kingsmen has a myriad of international clients such as The Gap, Burberry, Swarovski and others; and the good thing is that many of these are repeat customers, which means their customer base is strong and also growing. The presence of big name clients also mitigates the risk of bad debts, which are an important aspect of this business as most of the time the event has to be organized and over before clients pay up (though of course, they have to pay an upfront deposit first).
5) Economies of Scale provide barriers to entry – Some may argue that it is easy to organize such events and hire sub-contractors to set up the tentage or to do fitting out. This is true, and I do know of smaller companies who cater to the smaller scale road shows (of generic products or smaller brands). However, costs are always an uphill battle as there are no economies of scale or pricing power; so the smaller players are always struggling to contain costs and their profit margins are even lower than Kingsmen (assuming they even manage to break even, as it is a cutthroat business when you are a small player). Thus, Kingsmen’s scale gives them an advantage in terms of being able to bid for large projects with better revenues and margins, and to manage their costs better through economies of scale. This also acts as a barrier to entry as it is not easy for a small player to get larger because of existing business relationships between Kingsmen (as well as other large players like Pico) and international clients.
6) Low Working Capital Requirements – Kingsmen is essentially a service-based company and has no inventory, so this eliminates the risk of over-production and/or product obsolescence. As a result, it also has low working capital requirements as most of its expertise lies in its staff’s skills and service levels. Though staff costs are a large component of its cost structure, this is essentially a fixed costs except when using sub-contractors. This is the reason why the business requires little additional investment to scale up to other countries and it can continue to generate FCF every financial year.
7) Steady and increasing dividends – From the chart in Part 1 of this analysis, it can be seen that dividends are increasing every year since Kingsmen started paying an interim dividend, and this can be attributed to its business model which generates good FCF which it can pay out to shareholders twice a year. As the business is growing due to scaling up of competencies and capabilities, it looks like the dividend can at least be sustained. Assuming a yearly dividend of 3 cents per share (conservative), based on my purchase price of 56.5 cents, this represents a dividend yield of 5.3%.
As with any business, below are the negative aspects of Kingsmen which I have to list down as well, in order to make an informed decision:-
1) Low Margin Business – As a result of the nature of the business, net margins in this industry are generally low at 6-8%, and seldom exceed 10%. Low margin businesses are more vulnerable to “shocks” when expenses suddenly increase without warning, and a Company can fall into losses more easily if it does not practice good expense control. The good news is that the business is not exposed to commodity prices (raw materials), and also does not have financing costs as it is in a net cash position. This mitigates the risk somewhat.
2) Order-Book Driven Business – Kingsmen’s business is essentially order-book driven, and this has risks pertaining to % of completion of projects as well as ability to continually garner contracts/projects to ensure a steady revenue stream. Revenues and costs may also be “lumpy” due to the timing of recognition and progress billings.
3) Staff Costs are a major component of Kingsmen’s business model – As staff costs make up a large percentage of their total costs, Kingsmen are vulnerable to any economic or social policies implemented by Singapore which has a negative impact of staff costs, both in terms of welfare and benefits. For example, the Government recently announced hikes in Foreign Workers Levy (FWL), but it is not known if Kingsmen has a large proportion of foreign workers, so the impact of this measure should be muted.
4) Expertise and Experience is inherent in staff – Much of the expertise and skills which drive the business are inherent and internalized within staff and do not count as an asset on the Balance Sheet. This brings up the risk of key staff resigning or being “poached” by competitors, thereby taking with them valuable information and/or skill sets which Kingsmen may have painstakingly spent money to inculcate and develop. What the Company can do is to initiate a “buddy” system in which two staff have overlapping roles, to minimize the risk of a “vacuum” being left behind in case one suddenly resigns or falls ill.
5) Reliance on Sub-Contractors – Due to Kingsmen’s high reliance on contractors and sub-contractors, an increase in costs of materials will flow through to contractors and in turn, affect the margins Kingsmen enjoys through provision of services. Contractors may also have the upper hand in dictating prices to charge Kingsmen as Kingsmen may be highly reliant on them; this risk can be somewhat mitigated if Kingsmen uses more than one sub-contractor for a single event or fitting out.
6) Business is not recession-proof – Kingsmen’s business is NOT recession-proof, unlike industries like food and clothing which are considered necessities even in the event of a sharp downturn. Businesses will scale back on renovations and refurbishments during recessions and this will directly impact Kingsmen’s top line; for MICE industry, less exhibitions and trade shows will be held too if countries struggle to grapple with the effects of a prolonged recession.
From the above, it can be seen that the negative aspects are almost as numerous as the positive ones, which means a higher margin of safety is required. I have invested based on conservative price-earnings assumptions, low to zero growth and a constant (and perhaps decreasing) dividend payout. The economic recovery is not a given and many obstacles still abound, so being conservative means I still get to enjoy decent yield with no upside expectations. Therefore, I am unlikely to feel too disappointed and any upside in terms of earnings and valuation adjustments will represent a bonus. In the meantime, I will continue to keep a close watch on the Company's business, financials, industry and fundamentals.
Disclaimer: This 3-part analysis is not meant to be a guide or solicitation for readers to either purchase or sell shares in Kingsmen Creatives. It is merely meant to be a diary of my thought process when evaluating a Company for potential investment. Please do your own research and consult a trained professional if you are unsure of what to do.
Saturday, April 10, 2010
Personal Finance Part 17 – The Core Concepts of Cycling
I guess the first question many readers would ask when seeing the somewhat confusing title above is: how does cycling factor in personal finance? Well, my reply is that after seeing how COE prices have skyrocketed (yes, I can find no better word) to S$28,000+ for small cars, S$36,000+ for larger cars and S$42,000 for Open Category, I felt compelled to pen down my thoughts on how cycling can be a very rewarding alternative form of transport, albeit with its associated “cons”. In our small island called Singapore, somehow no one really gives cycling the kind of attention it deserves, and it seems to be relegated to two different camps: one of the enthusiasts (who are decked out in full gear including helmet, aerodynamic body suit, arm and knee pads and matching shoes), as well as foreign workers, who use cycling as a simple and cheap mode of transport to get from one work site to another, or from their work site to their living quarters. There seems to be scant attention paid to cycling as not just a form of recreation, but also a practical way of getting around the island.
For myself, I use my trusty bicycle for almost everything from buying groceries at nearby NTUC, for leisure rides (exercise), buying supper and also commuting to and from my tuition student’s house (I choose a student near my place which is accessible by bicycle). I only use the bus or my feet for purchases of bulky items, or during inclement weather. On average, I cycle about 10km per trip, with some leisure trips at East Coast Park bringing me a total of about 30km plus.
Let’s break down this topic into a few core central concepts (hence the title!):-
The Cost of Cycling
This is obviously a no-brainer, but I think it would be good to list the associated costs of owning a bicycle, in order to properly compare the cost of cycling (in monetary terms) compared with owning a car or taking public transport. I think there are enough websites dedicated to breaking down the cost of owning a car, such as this website, so I will simply delve into the costs of owning a bicycle.
Note: All the costs below relate to my current mountain bicycle, which was purchased in 2003 (from Rodalink at East Coast Road). The other incidental costs relate to repairs and maintenance plus replacement parts to keep my bicycle in working condition to this very day!
Cost of Bicycle: S$240
Cost of Brake Pads (replacing per year): About S$5
Cost of New Seat: S$30
Cost of New Wheel*: S$36
Cost of General Maintenance (per year): S$50
Adding up everything gives a total of about S$700, over a period of 7 years. This translates to about $100 per year or less than $10 per month. The figure above excludes the cost of a very good cable lock (about S$30-S$40) to securely lock your bicycle to prevent theft.
*Note: My front wheel got stolen some time in 2005 as I parked my bicycle near East Coast Road. To this day, I still wonder why anyone would bother to just steal one wheel and leave a bicycle “marooned”. Nowadays, I lock my bicycle’s body AND wheel too using 2 separate locks. These thieves are relentless……
The Benefits of Cycling
There are quite a few benefits related to cycling, and these are not just based on financial or health considerations. One of these is convenience, as one can go almost anywhere on a bicycle without much worries for traffic flow direction, and can also “squeeze” through narrow lanes or fields to “short-cut” one’s time taken. Couple this with a bag pack and basket (I don’t have one), and the bicycle becomes a perfect tool for grocery shopping. I use the bicycle for library books (borrowing and returning), buying groceries, visiting showflats nearby, commuting to tuition, running simple errands and buying food from hawker centres or McDonald’s.
The fact that one can “park” the bicycle anywhere also means you can mount and dismount almost anytime, and that to me is the ultimate convenience. With a car, one has to find a parking lot or else illegally park, and then the coupons or cash card has to be used for parking fees. A bicycle has no such additional fees and one can park anywhere as long as one does not obstruct the flow of traffic.
Cycling also has obvious health advantages in that one can build stamina and thigh muscles similar to cycling a stationery bicycle at the gym. I usually use the bicycle to work up a sweat and this ensures I get my weekly dose of exercise.
The Disadvantages of Cycling
The disadvantages of cycling are mainly due to distance, and weather conditions. Singapore being the humid and hot country that it is, makes it very tough to cycle for prolonged distances without ending up drenched in sweat. Even a short five-minute cycle to the nearby grocery shop in warm weather has my shirt soaked in perspiration, of which I have to change out of and maybe take a shower. I think this is the KEY reason why I do not see more Singaporeans (especially girls) using the bicycle as a mode of transport. Imagine cycling to your favourite mall dripping in sweat with half your make-up flowing down your face! Not a very pretty sight indeed. This is in contrast to China where the cool weather and low humidity means that droves of young people make use of cycling to get around (yes, including young nubile females too). This is one of my main grouses of cycling in Singapore, but over the years I have got used to it somewhat. If I need to, I just bring a towel and some change of clothing as well as a bottle of water and I can get by.
Another pet peeve of mine is that the roads are generally quite dangerous for cyclists, and weirdly enough, except for Tampines, everywhere else in Singapore it is considered a crime to cycle on the footpaths! Another contrast to China – there is a dedicated “cycling lane” just for scooters, motorized bikes and normal bicycles in most cities. This makes it very safe for bikers to use such lanes to get from one place to another, and cars also are careful to watch out for such cyclists as it is part of the inculcated culture. In Singapore, most motorists are impatient with cyclists and will honk at the first opportunity. Others simply like to speed (even across pedestrian crossings) and this makes it a bigger hazard for cyclists. Even with reflective clothing and back lights, cyclists remain at high risk on the roads. So, most of the time I stick to footpaths, even though technically it’s “illegal”. Add in a little courtesy (“excuse me, thank you”) and it all works out well in general.
Yet another major problem with cycling is that of the weather, which is somewhat of an understatement. Knowing Singapore’s tropical climate and penchant for sudden, thunderous rain storms, this makes cycling a rather unpredictable affair. These days I have learnt to anticipate strange weather conditions much better, and can act as an amateur weather forecaster because for me, it is so important to know the weather before you set out. Of course, even the best planning can fall flat and often times the return journey can be severely disrupted because of a sudden passing cloud. Suffice to say cycling is close to impossible if the rain gets heavier than a drizzle. Not only is visibility obscured, but the rain makes roads much more slippery and is also causes the dreaded “splash effect” (ok, it’s my fault for not installing a mud guard).
Suggestions on how to Enhance the Cycling Experience
The Government, in its relentless attempts to wean Singaporeans off the car, should actively promote the use of bicycles as they give out less pollution (more environmentally friendly) and take up much less space. But seeing how bicycles are not subject to expensive COEs and ERP systems, I guess the Government would be somewhat shooting itself in the foot if it promotes cycling as it will deprive itself of an extremely lucrative source of revenues. Nevertheless, I will list down a few suggestions I have on how to make cycling a safer and more economical alternative to driving or public transport.
First off, making ALL footpaths cyclist-friendly would be a good next step, other than just designating Tampines as a “cycling town”. This seems to imply that cyclists only exist in Tampines (of which I am not a resident of), which is somewhat ridiculous. Secondly, the Government could increase awareness of cyclists and educate road users on how to give way to cyclists and watch out for them on the roads. This can be done via incorporation into a motorist’s Basic or Advanced Theory lessons at driving school.
Another suggestion would be to set up bicycle points at strategic locations around the island, where cyclists can lock their bicycles under shelter. Currently, there are only “ad-hoc” bicycle locking locations and these locations are not enough and may be exposed to the elements. In a further bid to encourage cycling, the authorities can look into the “Ride and Park” scheme – bicycles can be rented out from one location and “returned” at another location (similar to borrowing library books); but users are charged a flat fee per month.
Conclusion
I have a Class 3 Driving License but still choose to use the bicycle as my main mode of transport. For purely personal reasons, I enjoy the thrill which cycling gives and the feeling of freedom. Maybe for reasons unknown, I tie back the feeling to the ones I had during my childhood and therefore experience the same kind of child-like joy when I am on my bicycle, even though I am a middle-aged adult now. Since happiness, pleasure and satisfaction are intensely personal, I can’t vouch that everyone who rides on a bicycle will feel the same way; but I am hoping they can trigger some sort of positive emotional response nonetheless. It constantly amazes me how many people do NOT know how to even cycle (mostly women). To me the two important life skills are swimming (in case you fall into the sea) and cycling. But in an urban jungle like Singapore, perhaps only swimming is emphasized; and cycling is overlooked because there is neither infrastructure nor impetus for this skill to be learnt.
If only more Singaporeans could look to cycling as a viable means of transportation, we could, as a group, lobby for the Government to take cycling to new levels. Currently, all I see around me are cyclists who are mainly foreign workers commuting to and fro; as well as the hard core fanatic cyclists who are decked out in full gear. Probably at least for the next 10-20 years, I do not see a change occurring anytime soon. Singaporeans will continue to be car-crazy (notwithstanding the high COE prices) and most will prefer to squeeze bum to bum in a crowded MRT carriage or bus. This post is just to highlight that cycling can be part of one’s personal finance plan to cut down on expenses over the long-term.
For myself, I use my trusty bicycle for almost everything from buying groceries at nearby NTUC, for leisure rides (exercise), buying supper and also commuting to and from my tuition student’s house (I choose a student near my place which is accessible by bicycle). I only use the bus or my feet for purchases of bulky items, or during inclement weather. On average, I cycle about 10km per trip, with some leisure trips at East Coast Park bringing me a total of about 30km plus.
Let’s break down this topic into a few core central concepts (hence the title!):-
The Cost of Cycling
This is obviously a no-brainer, but I think it would be good to list the associated costs of owning a bicycle, in order to properly compare the cost of cycling (in monetary terms) compared with owning a car or taking public transport. I think there are enough websites dedicated to breaking down the cost of owning a car, such as this website, so I will simply delve into the costs of owning a bicycle.
Note: All the costs below relate to my current mountain bicycle, which was purchased in 2003 (from Rodalink at East Coast Road). The other incidental costs relate to repairs and maintenance plus replacement parts to keep my bicycle in working condition to this very day!
Cost of Bicycle: S$240
Cost of Brake Pads (replacing per year): About S$5
Cost of New Seat: S$30
Cost of New Wheel*: S$36
Cost of General Maintenance (per year): S$50
Adding up everything gives a total of about S$700, over a period of 7 years. This translates to about $100 per year or less than $10 per month. The figure above excludes the cost of a very good cable lock (about S$30-S$40) to securely lock your bicycle to prevent theft.
*Note: My front wheel got stolen some time in 2005 as I parked my bicycle near East Coast Road. To this day, I still wonder why anyone would bother to just steal one wheel and leave a bicycle “marooned”. Nowadays, I lock my bicycle’s body AND wheel too using 2 separate locks. These thieves are relentless……
The Benefits of Cycling
There are quite a few benefits related to cycling, and these are not just based on financial or health considerations. One of these is convenience, as one can go almost anywhere on a bicycle without much worries for traffic flow direction, and can also “squeeze” through narrow lanes or fields to “short-cut” one’s time taken. Couple this with a bag pack and basket (I don’t have one), and the bicycle becomes a perfect tool for grocery shopping. I use the bicycle for library books (borrowing and returning), buying groceries, visiting showflats nearby, commuting to tuition, running simple errands and buying food from hawker centres or McDonald’s.
The fact that one can “park” the bicycle anywhere also means you can mount and dismount almost anytime, and that to me is the ultimate convenience. With a car, one has to find a parking lot or else illegally park, and then the coupons or cash card has to be used for parking fees. A bicycle has no such additional fees and one can park anywhere as long as one does not obstruct the flow of traffic.
Cycling also has obvious health advantages in that one can build stamina and thigh muscles similar to cycling a stationery bicycle at the gym. I usually use the bicycle to work up a sweat and this ensures I get my weekly dose of exercise.
The Disadvantages of Cycling
The disadvantages of cycling are mainly due to distance, and weather conditions. Singapore being the humid and hot country that it is, makes it very tough to cycle for prolonged distances without ending up drenched in sweat. Even a short five-minute cycle to the nearby grocery shop in warm weather has my shirt soaked in perspiration, of which I have to change out of and maybe take a shower. I think this is the KEY reason why I do not see more Singaporeans (especially girls) using the bicycle as a mode of transport. Imagine cycling to your favourite mall dripping in sweat with half your make-up flowing down your face! Not a very pretty sight indeed. This is in contrast to China where the cool weather and low humidity means that droves of young people make use of cycling to get around (yes, including young nubile females too). This is one of my main grouses of cycling in Singapore, but over the years I have got used to it somewhat. If I need to, I just bring a towel and some change of clothing as well as a bottle of water and I can get by.
Another pet peeve of mine is that the roads are generally quite dangerous for cyclists, and weirdly enough, except for Tampines, everywhere else in Singapore it is considered a crime to cycle on the footpaths! Another contrast to China – there is a dedicated “cycling lane” just for scooters, motorized bikes and normal bicycles in most cities. This makes it very safe for bikers to use such lanes to get from one place to another, and cars also are careful to watch out for such cyclists as it is part of the inculcated culture. In Singapore, most motorists are impatient with cyclists and will honk at the first opportunity. Others simply like to speed (even across pedestrian crossings) and this makes it a bigger hazard for cyclists. Even with reflective clothing and back lights, cyclists remain at high risk on the roads. So, most of the time I stick to footpaths, even though technically it’s “illegal”. Add in a little courtesy (“excuse me, thank you”) and it all works out well in general.
Yet another major problem with cycling is that of the weather, which is somewhat of an understatement. Knowing Singapore’s tropical climate and penchant for sudden, thunderous rain storms, this makes cycling a rather unpredictable affair. These days I have learnt to anticipate strange weather conditions much better, and can act as an amateur weather forecaster because for me, it is so important to know the weather before you set out. Of course, even the best planning can fall flat and often times the return journey can be severely disrupted because of a sudden passing cloud. Suffice to say cycling is close to impossible if the rain gets heavier than a drizzle. Not only is visibility obscured, but the rain makes roads much more slippery and is also causes the dreaded “splash effect” (ok, it’s my fault for not installing a mud guard).
Suggestions on how to Enhance the Cycling Experience
The Government, in its relentless attempts to wean Singaporeans off the car, should actively promote the use of bicycles as they give out less pollution (more environmentally friendly) and take up much less space. But seeing how bicycles are not subject to expensive COEs and ERP systems, I guess the Government would be somewhat shooting itself in the foot if it promotes cycling as it will deprive itself of an extremely lucrative source of revenues. Nevertheless, I will list down a few suggestions I have on how to make cycling a safer and more economical alternative to driving or public transport.
First off, making ALL footpaths cyclist-friendly would be a good next step, other than just designating Tampines as a “cycling town”. This seems to imply that cyclists only exist in Tampines (of which I am not a resident of), which is somewhat ridiculous. Secondly, the Government could increase awareness of cyclists and educate road users on how to give way to cyclists and watch out for them on the roads. This can be done via incorporation into a motorist’s Basic or Advanced Theory lessons at driving school.
Another suggestion would be to set up bicycle points at strategic locations around the island, where cyclists can lock their bicycles under shelter. Currently, there are only “ad-hoc” bicycle locking locations and these locations are not enough and may be exposed to the elements. In a further bid to encourage cycling, the authorities can look into the “Ride and Park” scheme – bicycles can be rented out from one location and “returned” at another location (similar to borrowing library books); but users are charged a flat fee per month.
Conclusion
I have a Class 3 Driving License but still choose to use the bicycle as my main mode of transport. For purely personal reasons, I enjoy the thrill which cycling gives and the feeling of freedom. Maybe for reasons unknown, I tie back the feeling to the ones I had during my childhood and therefore experience the same kind of child-like joy when I am on my bicycle, even though I am a middle-aged adult now. Since happiness, pleasure and satisfaction are intensely personal, I can’t vouch that everyone who rides on a bicycle will feel the same way; but I am hoping they can trigger some sort of positive emotional response nonetheless. It constantly amazes me how many people do NOT know how to even cycle (mostly women). To me the two important life skills are swimming (in case you fall into the sea) and cycling. But in an urban jungle like Singapore, perhaps only swimming is emphasized; and cycling is overlooked because there is neither infrastructure nor impetus for this skill to be learnt.
If only more Singaporeans could look to cycling as a viable means of transportation, we could, as a group, lobby for the Government to take cycling to new levels. Currently, all I see around me are cyclists who are mainly foreign workers commuting to and fro; as well as the hard core fanatic cyclists who are decked out in full gear. Probably at least for the next 10-20 years, I do not see a change occurring anytime soon. Singaporeans will continue to be car-crazy (notwithstanding the high COE prices) and most will prefer to squeeze bum to bum in a crowded MRT carriage or bus. This post is just to highlight that cycling can be part of one’s personal finance plan to cut down on expenses over the long-term.
Monday, April 05, 2010
Sun Tzu - War On Business Part 3 (Plastered 8)
Part 3 of Sun Tzu is also set in Beijing, China; but this time it focuses on a T-Shirt retailer called Plastered 8 (“P8”). This small business is located in a shophouse near a popular tourist belt and is headed by a Briton called Dominic Johnson-Hill (“Dominic”). He has been living in Beijing with his wife (Laura) for the past 17 years and is reasonably fluent with the Chinese language, so this helps in communicating with the locals and, we shall see, in getting his new T-shirt designs as well.
Essentially, the business designs T-Shirts with bold and progressive designs and then on-sells them to customers who enter the shop. Iconic images around Beijing are put on funky-looking T-Shirts as designs, capturing a significant amount of creativity (mostly coming from Dominic). Unfortunately, the business has stayed stagnant over the years and has not grown (though it is still profitable). The problem has been identified by James Sun as competition, which comes in the form of nearby shops who shamelessly imitate the designs and ideas which Dominic has painstakingly searched for. Dominic is a tireless entrepreneur who will be personally involved (same problem as in Part 2’s CCC) in trawling the streets of Beijing for ideas with which to put onto his T-Shirts to make them eye-catching and funky. (Note: Once again, numbers such as number of T-Shirts sold, gross margins and revenue figures are not provided in this program).
James Sun interviews some passers-by on the street and their reply was that P8 did not differentiate itself much from the competition, and they do not feel that P8’s designs are unique or ground-breaking. This is due to the intense copying which other shops have started to do, and so the main differentiator in this case would be price. In fact, P8 is feeling the heat here and is starting to advertise for 2 T-Shirts for the price of 1. James feels that once a business starts competing on price without product differentiation, it is the beginning of a downhill battle in which all players will lose. On a side note, this is akin to price wars initiated by telcos or airlines in which only the customer benefits (but not the companies itself). Dominic himself has admitted he is not a “numbers guy” and is more focused on designs and ideas, hence the business has been unable to grow.
In the War Room, James once again enlists the help of Yifei Li and together they both inform Dominic that he needs to differentiate his brand from the competition. They suggest using music to bring the brand to a wider audience, and for him to create a sub-culture with his T-Shirts which will then sell well as it will cater to a particular market segment. Dominic agrees to the re-branding exercise and promises to make use of music to cement his brand amongst the youth and to project a more “hip” and “cool” image.
5 weeks later, Dominic has enlisted the services of one of Beijing’s Top 10 rock bands to supply them with P8 T-Shirts, and also to perform in a venue along one of Beijing’s busiest streets. The costs of this event are not mentioned, but the important fact is that it will provide an immediate boost to visibility for the brand and also Dominic’s T-Shirt designs.
The concert proceeds smoothly and helps to cement P8’s T-Shirts as cool, hip and decidedly underground. By targeting such a niche segment, P8 has differentiated their brand from all the other wannabes out there who are simply copying and pasting designs without much originality. A website has also been created for selling P8 T-Shirts online to further boost sales, in addition to walk-in customers to the brick and mortar store front. This two-prong approach will increase P8’s reach and customer base as the proportion of customers who do online shopping is steadily increasing.
The lessons to learn here are as follows:-
1) Delegate and Segregate – Similar to the lessons in CCC, Dominic has to learn how to delegate some of the more menial work to his Management Team, and to segregate duties properly so as to avoid inefficiencies and duplication. He himself, being a designer, should use his ideas to inspire rather than getting down and dirty to look for new designs. This can be “outsourced” to other designers who can come up with innovative ideas as well.
2) Leverage on Branding – Throughout the program, I get the feeling that Dominic is a competent designer and businessman but he somehow under-estimates the power and influence of branding, to his detriment. His P8 brand does not have a clear brand identity and was becoming lost in the cacophony of brands being churned out like a factory floor out in Beijing’s streets. In order to regain control again, he needed to do proper and targeted branding which includes events and sustained A&P activities.
3) Price is not a competitive edge – In the early part of the program, Dominic can be seen putting up a sign for a discount on P8’s T-Shirts, essentially under-cutting his competition. This had the potential to escalate into a price war, and would be disastrous for all players in the industry. Competing on price alone is NOT a competitive advantage unless you can produce much more cheaply than all your competitors, which was not the case for P8.
4) Identifying relevant niche segments – It was interesting how James and Yifei Li mentioned that P8 needed to lock arms with music and create a brand identity. In a way, they are encouraging Dominic to identify and relate to niche segments which can help the brand to thrive and grow.
Overall, I feel that Dominic had become wiser from the experience, and has begun to see things in a different light after receiving advice from James and Yifei in the War Room. He now realizes that he has to do more to differentiate his brand and grow his business. Competition will always inevitably set in and one must always innovate and think of ideas on how to differentiate one’s brand from the copycats. It’s a never-ending process and that is what characterizes the job of a business owner. He must always be vigilant for changes in the competitive landscape and industry and react accordingly, otherwise he will be left behind in the dust.
Part 4 of this series shall cover business owner Kavita, and he clothing business Asian Woman based in Singapore.
Please visit Plastered 8's website at http://www.plasteredtshirts.com/
Essentially, the business designs T-Shirts with bold and progressive designs and then on-sells them to customers who enter the shop. Iconic images around Beijing are put on funky-looking T-Shirts as designs, capturing a significant amount of creativity (mostly coming from Dominic). Unfortunately, the business has stayed stagnant over the years and has not grown (though it is still profitable). The problem has been identified by James Sun as competition, which comes in the form of nearby shops who shamelessly imitate the designs and ideas which Dominic has painstakingly searched for. Dominic is a tireless entrepreneur who will be personally involved (same problem as in Part 2’s CCC) in trawling the streets of Beijing for ideas with which to put onto his T-Shirts to make them eye-catching and funky. (Note: Once again, numbers such as number of T-Shirts sold, gross margins and revenue figures are not provided in this program).
James Sun interviews some passers-by on the street and their reply was that P8 did not differentiate itself much from the competition, and they do not feel that P8’s designs are unique or ground-breaking. This is due to the intense copying which other shops have started to do, and so the main differentiator in this case would be price. In fact, P8 is feeling the heat here and is starting to advertise for 2 T-Shirts for the price of 1. James feels that once a business starts competing on price without product differentiation, it is the beginning of a downhill battle in which all players will lose. On a side note, this is akin to price wars initiated by telcos or airlines in which only the customer benefits (but not the companies itself). Dominic himself has admitted he is not a “numbers guy” and is more focused on designs and ideas, hence the business has been unable to grow.
In the War Room, James once again enlists the help of Yifei Li and together they both inform Dominic that he needs to differentiate his brand from the competition. They suggest using music to bring the brand to a wider audience, and for him to create a sub-culture with his T-Shirts which will then sell well as it will cater to a particular market segment. Dominic agrees to the re-branding exercise and promises to make use of music to cement his brand amongst the youth and to project a more “hip” and “cool” image.
5 weeks later, Dominic has enlisted the services of one of Beijing’s Top 10 rock bands to supply them with P8 T-Shirts, and also to perform in a venue along one of Beijing’s busiest streets. The costs of this event are not mentioned, but the important fact is that it will provide an immediate boost to visibility for the brand and also Dominic’s T-Shirt designs.
The concert proceeds smoothly and helps to cement P8’s T-Shirts as cool, hip and decidedly underground. By targeting such a niche segment, P8 has differentiated their brand from all the other wannabes out there who are simply copying and pasting designs without much originality. A website has also been created for selling P8 T-Shirts online to further boost sales, in addition to walk-in customers to the brick and mortar store front. This two-prong approach will increase P8’s reach and customer base as the proportion of customers who do online shopping is steadily increasing.
The lessons to learn here are as follows:-
1) Delegate and Segregate – Similar to the lessons in CCC, Dominic has to learn how to delegate some of the more menial work to his Management Team, and to segregate duties properly so as to avoid inefficiencies and duplication. He himself, being a designer, should use his ideas to inspire rather than getting down and dirty to look for new designs. This can be “outsourced” to other designers who can come up with innovative ideas as well.
2) Leverage on Branding – Throughout the program, I get the feeling that Dominic is a competent designer and businessman but he somehow under-estimates the power and influence of branding, to his detriment. His P8 brand does not have a clear brand identity and was becoming lost in the cacophony of brands being churned out like a factory floor out in Beijing’s streets. In order to regain control again, he needed to do proper and targeted branding which includes events and sustained A&P activities.
3) Price is not a competitive edge – In the early part of the program, Dominic can be seen putting up a sign for a discount on P8’s T-Shirts, essentially under-cutting his competition. This had the potential to escalate into a price war, and would be disastrous for all players in the industry. Competing on price alone is NOT a competitive advantage unless you can produce much more cheaply than all your competitors, which was not the case for P8.
4) Identifying relevant niche segments – It was interesting how James and Yifei Li mentioned that P8 needed to lock arms with music and create a brand identity. In a way, they are encouraging Dominic to identify and relate to niche segments which can help the brand to thrive and grow.
Overall, I feel that Dominic had become wiser from the experience, and has begun to see things in a different light after receiving advice from James and Yifei in the War Room. He now realizes that he has to do more to differentiate his brand and grow his business. Competition will always inevitably set in and one must always innovate and think of ideas on how to differentiate one’s brand from the copycats. It’s a never-ending process and that is what characterizes the job of a business owner. He must always be vigilant for changes in the competitive landscape and industry and react accordingly, otherwise he will be left behind in the dust.
Part 4 of this series shall cover business owner Kavita, and he clothing business Asian Woman based in Singapore.
Please visit Plastered 8's website at http://www.plasteredtshirts.com/
Wednesday, March 31, 2010
March 2010 Portfolio Summary and Review
March 2010 turned out to be a seriously boring month, in terms of both corporate news and developments as well as economic issues. The same usual issues were “recycled” back and forth while the experts at the top debated over economic policies for the USA, with the Federal Reserve again holding the benchmark rates at record lows (as expected) to allow the US economy to recover further. In spite of all this, unemployment rates remained high and the housing market stayed sluggish; signs pointing to a very slow (but probably more sustainable) recovery.
The same few issues saw frequent rotation in the news – that of Greece’s debt as well as China’s growth (or over-heating if you want to call it that). Many US blue-chip companies also released results and gave forward guidances which were positive, as the economic recovery meant spending would increase and demand for goods and services recovering to pre-crisis levels. This had the effect of pushing the US Stock Market gradually higher, and it broke 17-month highs recently on renewed optimism; but it was still significantly below the all-time high of 14,000 reached during the heights of the bull market in October 2007. It has been about 2.5 years since the peak was breached, and throughout history the average time period for a bear market recovery has been about 4-5 years.
With low interest rates, Singapore’s property market went into (another) frenzy, with many mass market projects hitting new highs (The Vision at west coast area sold for >S$1,000 psf despite leasehold, a record for that area), while The Estuary in Yishun also saw healthy demand despite exorbitant pricing (this is the author’s own personal opinion). The reasons given were the usual – record low interest rates, massive liquidity sloshing around as a result of the unprecedented stimulus packages, and also people’s risk appetite increasing as they sought to park their funds in investments which yielded returns above inflation (and pathetic bank interest rates). In this kind of environment, what could go wrong? The newspapers have been trumpeting bullish news for months and new records are being set even as I type this.
Even with the recent measures announced by the Government to dampen speculation in both private property and HDB, prices still seem to rise unabated. I myself have visited some showflats to get a sense of what is out there, and came back amazed and flabbergasted by the strong take-up response of seemingly pricey units. Some were as tiny as 500 square feet but going for $1,600 psf (Mickey Mouse units, no doubt). Others boasted of potential new MRT developments, never mind that these plans will not materialize for the next 10 years! Everyone is riding along on a wave of euphoria, and even the sales agents at each launch seem overly exuberant and look like sharks eager for their (almost guaranteed) fat commissions. HDB resale prices have soared to new highs with an apartment in Bras Basah “smashing” records and commanding a COV of S$70,000!
With the announcement of the COE quota cut, COE prices shot through the roof, with small car COEs hitting S$28,000 and larger cars hitting S$36,000. Open Category actually hit an amazing S$42,000, a level not seen since the 1990s. So to add insult to injury, not only do we have rising unaffordability in HDB and private properties, it has trickled down to transportation as well. Singapore is truly an amazing place to live in – sometimes I wonder if my neighbourhood shop will start selling a loaf of bread for S$5.00 in time to come?
The Singapore stock market saw many small penny stocks running up recently, as interest rotated to the smaller companies as the major blue chips were perceived to be “fully valued”. Companies such as Healthway Medical, Techcomp and even OSIM were heavily traded, and in more than one case there was an amazing jump in market prices (and hence valuations). Whether these enhanced expectations can be met or not would depend on time, but if an investor were to target promising companies for investment, generally he would avoid those with too much coverage, news and hype.
Another interesting development was that Oslo Bors and Singapore Stock Exchange were in talks for dual listing of companies on both bourses, with a focus on oil and gas as this was the specialization of Oslo Bors. Already, China Fishery aims to list on Oslo Bors while Golden Ocean has listed on SGX as part of this agreement, and more companies may follow. Note that this is all part and parcel of raising money through an alternative secondary route, and does not in any way imply that such dual-listed companies are “superior” to those already listed on either exchange. The euphoria continues for Hong-Kong dual listings, with another company Swing Media announcing this as well. A few other companies such as Bread Talk and Techcomp have announced bonus issues and share splits respectively, and one wonders about the rationale for such administrative exercises, since they add nothing to shareholder value and only serves to give an illusion of being beneficial in the long-run. I have always maintained that such corporate actions are “cosmetic”, and I have also frowned upon Boustead’s 1:1 split back in 2008.
Cash reserves continue to build up and now there is a healthy balance with which to purchase shares of good companies, assuming I have the time to do my research! Below is a snapshot of my portfolio and associated comments for March 2010:-
1) Boustead Holdings Limited – After market close today on March 31, 2010, Boustead made two announcements. One was that its 91.7% owned Boustead Projects was awarded a S$40 million contract by Cenco inc. to design and build an integrated test facility and this makes it the fifth contract which Boustead Projects secured in 8 months. The facility will occupy 7,900 square metres and is expected to be completed by 2Q 2011. Separately, another announcement stated that Boustead Projects had been awarded a second contract from the Safran Group (the value was not mentioned). This announcement is separate from the first one although Cenco Inc is a company within the Safran Group. Boustead Projects will design, build and lease an integrated factory and office facility occupying 6,000 square metres spread over two floors and it will be completed in 1Q 2011.
2) Suntec REIT – With the news statutory requirement for REITs to hold AGMs, Suntec REIT will be holding its first AGM on April 15, 2010 at (where else) Suntec City Convention Centre Level 3 at 10:30 a.m. There will also be an EGM held at the same time and a circular was despatched to shareholders for these meetings. The Annual Report for 2009 was received and makes for interesting reading.
3) First Ship Lease Trust – There was no news from FSL Trust in the month of March 2010. Latest update on shipping trusts in general is that the coast is far from clear, and many concerns still dog shipping trusts in general, threatening their business model. I also received FSL Trust’s Annual Report for 2009, and will be perusing through and posting any interesting bits I see.
4) Tat Hong Holdings Limited – Surprisingly, there was quite a bit of corporate news from Tat Hong in March 2010. Firstly, on March 1, 2010, they announced corporate reshuffling by placing 4 CEOs to take care of their markets located in different regions, and mentioned that this reshuffling was “in line with planned expansion”, though no further details were provided as to what constitutes “planned expansion”. Then on March 4, as if to give hints of their plans, they announced the incorporation of a new wholly-owned subsidiary Tat Hong Heavylift Pte Ltd with a paid-up capital of S$10 million (no small sum). So it could be that Tat Hong intends to build up this division of their business, to be in direct competition with its competitor Tiong Woon (which does Heavy Lift and Haulage). On March 16, another corporate announcement stated that Tat Hong was increasing their investment in Beijing Tat Hong Zhaomao Equipment Rental Co., Ltd (a tower crane rental company) from RMB 11 million to RMB 27.5 million (an increase of RMB 16.5 million or about S$3.4 million), using the proceeds from the issuance of the RCPS (increasing their stake from 55% to 100%). These corporate developments seem to imply that Tat Hong is gearing up to expand their product/service offerings, and that their tower crane division is doing very well (as they are increasing their stake hence also consolidating 100% of earnings instead of just 55%).
5) MTQ Corporation Limited – On March 15, 2010, MTQ announced that they had purchased 100% of the business assets of an Australian company Premier Fuel Injection Services Pty Ltd, for a cash consideration of A$500,000. This company is a privately owned service organization engaged in the diagnostic and repair of diesel fuel injection parts and engine management systems, and is located in the State of Northern Territory (“NT”). The rationale for the M&A is that MTQES owns a network of 9 branches within Australia but NT is one of the few capital cities that MTQES does not operate in, thus the acquisition will broaden their network and reach and enhance MTQES’ service offerings. The operations will contribute to the FY 2011 operational results. Separately, CEO Kuah Kok Kim purchased another 93,000 shares in MTQ at S$0.72 on March 17, 2010, raising his stake to 22.474 million shares (25.52% of the Company). Yet again on March 30, 2010, MTQ announced that it had injected a further USD 495,000 (about SGD 691,020) into MTQ Oilfield Services W.L.L (MTQ Bahrain), which is a 99% subsidiary. MTQ Engineering also injected USD 5,000 for its 1% stake in MTQ Bahrain. Both injections were from internal cash flows.
6) GRP Limited – There was no news from GRP for the month of March 2010.
7) Kingsmen Creatives Holdings Limited – There was no news from the Company for March 2010.
Portfolio Review – March 2010
My realized gains remained stable at S$53.6K as there were no dividends for March 2010, and also no capital gains or losses. The portfolio improved from an unrealized gain of +5.4% to an unrealized gain of +10.5%. Volume is dwindling rapidly and trading is also anaemic on the Stock Exchange, so altogether it has been a very boring and sluggish month (again!). If not for some corporate announcements keeping me tied up, it would have been uneventful even in terms of economic news.
April 2010 should see some corporate result announcements from Suntec REIT and FSL Trust, and hopefully some decent dividends will start trickling in from May 2010 onwards.
My next portfolio review will be on April 30, 2010 (Friday).
The same few issues saw frequent rotation in the news – that of Greece’s debt as well as China’s growth (or over-heating if you want to call it that). Many US blue-chip companies also released results and gave forward guidances which were positive, as the economic recovery meant spending would increase and demand for goods and services recovering to pre-crisis levels. This had the effect of pushing the US Stock Market gradually higher, and it broke 17-month highs recently on renewed optimism; but it was still significantly below the all-time high of 14,000 reached during the heights of the bull market in October 2007. It has been about 2.5 years since the peak was breached, and throughout history the average time period for a bear market recovery has been about 4-5 years.
With low interest rates, Singapore’s property market went into (another) frenzy, with many mass market projects hitting new highs (The Vision at west coast area sold for >S$1,000 psf despite leasehold, a record for that area), while The Estuary in Yishun also saw healthy demand despite exorbitant pricing (this is the author’s own personal opinion). The reasons given were the usual – record low interest rates, massive liquidity sloshing around as a result of the unprecedented stimulus packages, and also people’s risk appetite increasing as they sought to park their funds in investments which yielded returns above inflation (and pathetic bank interest rates). In this kind of environment, what could go wrong? The newspapers have been trumpeting bullish news for months and new records are being set even as I type this.
Even with the recent measures announced by the Government to dampen speculation in both private property and HDB, prices still seem to rise unabated. I myself have visited some showflats to get a sense of what is out there, and came back amazed and flabbergasted by the strong take-up response of seemingly pricey units. Some were as tiny as 500 square feet but going for $1,600 psf (Mickey Mouse units, no doubt). Others boasted of potential new MRT developments, never mind that these plans will not materialize for the next 10 years! Everyone is riding along on a wave of euphoria, and even the sales agents at each launch seem overly exuberant and look like sharks eager for their (almost guaranteed) fat commissions. HDB resale prices have soared to new highs with an apartment in Bras Basah “smashing” records and commanding a COV of S$70,000!
With the announcement of the COE quota cut, COE prices shot through the roof, with small car COEs hitting S$28,000 and larger cars hitting S$36,000. Open Category actually hit an amazing S$42,000, a level not seen since the 1990s. So to add insult to injury, not only do we have rising unaffordability in HDB and private properties, it has trickled down to transportation as well. Singapore is truly an amazing place to live in – sometimes I wonder if my neighbourhood shop will start selling a loaf of bread for S$5.00 in time to come?
The Singapore stock market saw many small penny stocks running up recently, as interest rotated to the smaller companies as the major blue chips were perceived to be “fully valued”. Companies such as Healthway Medical, Techcomp and even OSIM were heavily traded, and in more than one case there was an amazing jump in market prices (and hence valuations). Whether these enhanced expectations can be met or not would depend on time, but if an investor were to target promising companies for investment, generally he would avoid those with too much coverage, news and hype.
Another interesting development was that Oslo Bors and Singapore Stock Exchange were in talks for dual listing of companies on both bourses, with a focus on oil and gas as this was the specialization of Oslo Bors. Already, China Fishery aims to list on Oslo Bors while Golden Ocean has listed on SGX as part of this agreement, and more companies may follow. Note that this is all part and parcel of raising money through an alternative secondary route, and does not in any way imply that such dual-listed companies are “superior” to those already listed on either exchange. The euphoria continues for Hong-Kong dual listings, with another company Swing Media announcing this as well. A few other companies such as Bread Talk and Techcomp have announced bonus issues and share splits respectively, and one wonders about the rationale for such administrative exercises, since they add nothing to shareholder value and only serves to give an illusion of being beneficial in the long-run. I have always maintained that such corporate actions are “cosmetic”, and I have also frowned upon Boustead’s 1:1 split back in 2008.
Cash reserves continue to build up and now there is a healthy balance with which to purchase shares of good companies, assuming I have the time to do my research! Below is a snapshot of my portfolio and associated comments for March 2010:-
1) Boustead Holdings Limited – After market close today on March 31, 2010, Boustead made two announcements. One was that its 91.7% owned Boustead Projects was awarded a S$40 million contract by Cenco inc. to design and build an integrated test facility and this makes it the fifth contract which Boustead Projects secured in 8 months. The facility will occupy 7,900 square metres and is expected to be completed by 2Q 2011. Separately, another announcement stated that Boustead Projects had been awarded a second contract from the Safran Group (the value was not mentioned). This announcement is separate from the first one although Cenco Inc is a company within the Safran Group. Boustead Projects will design, build and lease an integrated factory and office facility occupying 6,000 square metres spread over two floors and it will be completed in 1Q 2011.
2) Suntec REIT – With the news statutory requirement for REITs to hold AGMs, Suntec REIT will be holding its first AGM on April 15, 2010 at (where else) Suntec City Convention Centre Level 3 at 10:30 a.m. There will also be an EGM held at the same time and a circular was despatched to shareholders for these meetings. The Annual Report for 2009 was received and makes for interesting reading.
3) First Ship Lease Trust – There was no news from FSL Trust in the month of March 2010. Latest update on shipping trusts in general is that the coast is far from clear, and many concerns still dog shipping trusts in general, threatening their business model. I also received FSL Trust’s Annual Report for 2009, and will be perusing through and posting any interesting bits I see.
4) Tat Hong Holdings Limited – Surprisingly, there was quite a bit of corporate news from Tat Hong in March 2010. Firstly, on March 1, 2010, they announced corporate reshuffling by placing 4 CEOs to take care of their markets located in different regions, and mentioned that this reshuffling was “in line with planned expansion”, though no further details were provided as to what constitutes “planned expansion”. Then on March 4, as if to give hints of their plans, they announced the incorporation of a new wholly-owned subsidiary Tat Hong Heavylift Pte Ltd with a paid-up capital of S$10 million (no small sum). So it could be that Tat Hong intends to build up this division of their business, to be in direct competition with its competitor Tiong Woon (which does Heavy Lift and Haulage). On March 16, another corporate announcement stated that Tat Hong was increasing their investment in Beijing Tat Hong Zhaomao Equipment Rental Co., Ltd (a tower crane rental company) from RMB 11 million to RMB 27.5 million (an increase of RMB 16.5 million or about S$3.4 million), using the proceeds from the issuance of the RCPS (increasing their stake from 55% to 100%). These corporate developments seem to imply that Tat Hong is gearing up to expand their product/service offerings, and that their tower crane division is doing very well (as they are increasing their stake hence also consolidating 100% of earnings instead of just 55%).
5) MTQ Corporation Limited – On March 15, 2010, MTQ announced that they had purchased 100% of the business assets of an Australian company Premier Fuel Injection Services Pty Ltd, for a cash consideration of A$500,000. This company is a privately owned service organization engaged in the diagnostic and repair of diesel fuel injection parts and engine management systems, and is located in the State of Northern Territory (“NT”). The rationale for the M&A is that MTQES owns a network of 9 branches within Australia but NT is one of the few capital cities that MTQES does not operate in, thus the acquisition will broaden their network and reach and enhance MTQES’ service offerings. The operations will contribute to the FY 2011 operational results. Separately, CEO Kuah Kok Kim purchased another 93,000 shares in MTQ at S$0.72 on March 17, 2010, raising his stake to 22.474 million shares (25.52% of the Company). Yet again on March 30, 2010, MTQ announced that it had injected a further USD 495,000 (about SGD 691,020) into MTQ Oilfield Services W.L.L (MTQ Bahrain), which is a 99% subsidiary. MTQ Engineering also injected USD 5,000 for its 1% stake in MTQ Bahrain. Both injections were from internal cash flows.
6) GRP Limited – There was no news from GRP for the month of March 2010.
7) Kingsmen Creatives Holdings Limited – There was no news from the Company for March 2010.
Portfolio Review – March 2010
My realized gains remained stable at S$53.6K as there were no dividends for March 2010, and also no capital gains or losses. The portfolio improved from an unrealized gain of +5.4% to an unrealized gain of +10.5%. Volume is dwindling rapidly and trading is also anaemic on the Stock Exchange, so altogether it has been a very boring and sluggish month (again!). If not for some corporate announcements keeping me tied up, it would have been uneventful even in terms of economic news.
April 2010 should see some corporate result announcements from Suntec REIT and FSL Trust, and hopefully some decent dividends will start trickling in from May 2010 onwards.
My next portfolio review will be on April 30, 2010 (Friday).
Thursday, March 25, 2010
Kingsmen Creatives - Analysis of Purchase Part 2
Part 2 of Kingsmen’s analysis shall touch on the Cash Flow Statement analysis and review, as well as the different business divisions of the Group and their clientele and customer base.
Cash Flow Statement Analysis
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Looking at Kingsmen’s cash flows, one can see that apart from FY 2003 (listing year), they had managed to generate free cash flows (FCF) every single financial year from FY 2004 to FY 2008. For 9M FY 2009, the presence of negative operating cash inflows was due to the large Universal Studios contract which had a lot of unbilled revenues attached to it. Thus, there was a time lag in billing and receiving the cash, which was why the receivables had climbed significantly in relation to the rise in revenues.
One can also observe that apart from FY 2008 where there was a major acquisition of PPE, working capital requirements in terms of capex are low for Kingsmen’s business and the business is adept at generating excess cash which it then pays out as dividends to shareholders. Starting from FY 2008, Kingsmen had started to pay out 2 dividends per year – interim as well as final.
Business Divisions Summary
Its two main divisions are Museums and Exhibitions, as well as Interiors. Museums and Exhibitions form about 55.3% of their revenues (as at Sep 30, 2009), while Interiors took up about 39.2%. Kingsmen offers a comprehensive range of services for exhibition and events such as design, project management and construction of single and double-storey stands for special events such as roadshows, conferences and sporting events. Some of the contributors to Kingsmen’s revenue include events such as HK Asian Aerospace, Macao Science Centre, Seoul Airshow and Sibos 2009. They also have a S$59.5 million contract with Universal Studios at Resorts World Sentosa to develop the themed façade, and to provide area development works. They are optimistic of clinching the Phase 2 of the Universal Studios contract later in FY 2010.
As for Interiors division, it is in charge of roll-out management, custom fixture manufacturing, warehousing and logistics management for middle to upper-end retail customers. Kingsmen help to design and fit out the interiors for world-renowned brands such as Polo Ralph Lauren, Swarovski, Tag Heuer and Tiffany.
The other two smaller business divisions are Research and Designs, which contributed to 2.4% of revenues, and Integrated Marketing Communications (“IMC”), which contributed to 3% of revenues. IMC is in charge of providing total solutions to clients and boast a comprehensive range of services such as conceptualisation, design, production, project and event management. Basically, these services enhance value for the client and are a result of the expertise and experience which Kingsmen has accrued over the years.
Analysis of Revenues and Margins
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From the diagram, it is clear that the bulk of Kingsmen’s revenues are derived from the Museums and Exhibitions (“Museums”) as well as Interiors Divisions. In FY 2003, Museums used to take up just 40% of revenues while Interiors took up 54.5%; but in FY 2008, the ratio has shifted to 47% for Museums and in 9M FY 2009, the ratio is a very high 55%. This shift is partly due to the Universal Studios contract and also the heightened MICE activity in Singapore and South-East Asia of which Kingsmen is actively involved in.
One should also note that revenues have been steadily rising over the years, as Singapore and the South-East Asian region become more and more of a hub for MICE events and also for international brands to set up shop. The boom in Singapore, Hong Kong and China has attracted many luxury brand names to set up retail outlets and boutiques; and this has enlarged the pie for all players in the fittings industry. The volume of MICE events, exhibitions and other major events such as Formula 1 has also increased tremendously as the two Integrated Resorts open their doors in FY 2010; and this will be a permanent platform for the Company to tap on for recurring revenues. In short, Singapore has changed permanently and the market for MICE events is much larger than it used to be.
Looking at net profits, Interiors makes up the larger bulk of net profits as it has a better profit margin than Museums. Interiors usually makes up about 50% of the profits while Museums takes up about 35% to 45%. The quantum of net profits has been steadily increasing as the volume of Kingsmen’s business grows; and it is a business which can scale up easily without incurring too much additional expenses as it is predominantly a services business.
Net profit margins are higher for Interiors division as well, at 11.3% for FY 2008, compared to just 8.1% for Museums. Integrated Marketing Communications is seeing better margins as it helps to provide total solutions to customers who look for innovative marketing ideas.
Business Unit Geographical Analysis
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In FY 2003, Singapore made up the bulk of revenues for Kingsmen (72.2%) while Asia (comprising China at the time) took up 7.5%. United States and Canada took up another 8.1%. Now, in FY 2008, Kingmen’s revenues still stem mainly from Singapore but the proportion has fallen to just 40.6%, while a large bulk comes from Greater China at 23%. Europe still contributed about 11.8% to revenues as Kingsmen designs and exports fixtures out to Europe and this has been a booming business for them. The contribution from USA and Canada has shrunk to just 2.1%, while the Middle East is a new growing geographical segment, contributing 4.8% for FY 2008, up from 1.1% in FY 2006 and 3.8% in FY 2007.
From this simple diagram, it can be seen that Kingsmen has slowly but surely extended its reach beyond Singapore. Although Kingsmen is a home-grown company, it has managed to broaden its services to other regions as well in recent years, with more contributions flowing in from Greater China, and also penetrating Dubai in the Middle East. Kingsmen has also set up offices in Korea to take advantage of opportunities there and their plan is to increase their presence in China and India as well as these are emerging economies and the level of Museums, Exhibitions and MICE events is set to grow.
As Kingsmen expands their footprint across the region, I think we can expect to see them moving into new territories in the next few years as their business is easily scalable with minimal increase in working capital.
Part 3 of the analysis will present competitive analysis for Kingsmen, the first time I am including such a feature. It will give a brief summary of competitors Pico Far East (market leader based in Hong Kong), as well as Cityneon (smaller competitor) and Design Studio (A specialist furniture manufacturer which has overlapping Interiors business with Kingsmen). I will also touch on prospects and plans including the upcoming major events in the South-East Asian region, as well as to comment on how the business model of Kingsmen can help sustain revenues and recurrent cash flows which are vital to the business. I will end off with a wrap-up of the merits and demerits and the rationale for the final decision to purchase shares in the Company.
Cash Flow Statement Analysis
.jpg)
Looking at Kingsmen’s cash flows, one can see that apart from FY 2003 (listing year), they had managed to generate free cash flows (FCF) every single financial year from FY 2004 to FY 2008. For 9M FY 2009, the presence of negative operating cash inflows was due to the large Universal Studios contract which had a lot of unbilled revenues attached to it. Thus, there was a time lag in billing and receiving the cash, which was why the receivables had climbed significantly in relation to the rise in revenues.
One can also observe that apart from FY 2008 where there was a major acquisition of PPE, working capital requirements in terms of capex are low for Kingsmen’s business and the business is adept at generating excess cash which it then pays out as dividends to shareholders. Starting from FY 2008, Kingsmen had started to pay out 2 dividends per year – interim as well as final.
Business Divisions Summary
Its two main divisions are Museums and Exhibitions, as well as Interiors. Museums and Exhibitions form about 55.3% of their revenues (as at Sep 30, 2009), while Interiors took up about 39.2%. Kingsmen offers a comprehensive range of services for exhibition and events such as design, project management and construction of single and double-storey stands for special events such as roadshows, conferences and sporting events. Some of the contributors to Kingsmen’s revenue include events such as HK Asian Aerospace, Macao Science Centre, Seoul Airshow and Sibos 2009. They also have a S$59.5 million contract with Universal Studios at Resorts World Sentosa to develop the themed façade, and to provide area development works. They are optimistic of clinching the Phase 2 of the Universal Studios contract later in FY 2010.
As for Interiors division, it is in charge of roll-out management, custom fixture manufacturing, warehousing and logistics management for middle to upper-end retail customers. Kingsmen help to design and fit out the interiors for world-renowned brands such as Polo Ralph Lauren, Swarovski, Tag Heuer and Tiffany.
The other two smaller business divisions are Research and Designs, which contributed to 2.4% of revenues, and Integrated Marketing Communications (“IMC”), which contributed to 3% of revenues. IMC is in charge of providing total solutions to clients and boast a comprehensive range of services such as conceptualisation, design, production, project and event management. Basically, these services enhance value for the client and are a result of the expertise and experience which Kingsmen has accrued over the years.
Analysis of Revenues and Margins
.jpg)
From the diagram, it is clear that the bulk of Kingsmen’s revenues are derived from the Museums and Exhibitions (“Museums”) as well as Interiors Divisions. In FY 2003, Museums used to take up just 40% of revenues while Interiors took up 54.5%; but in FY 2008, the ratio has shifted to 47% for Museums and in 9M FY 2009, the ratio is a very high 55%. This shift is partly due to the Universal Studios contract and also the heightened MICE activity in Singapore and South-East Asia of which Kingsmen is actively involved in.
One should also note that revenues have been steadily rising over the years, as Singapore and the South-East Asian region become more and more of a hub for MICE events and also for international brands to set up shop. The boom in Singapore, Hong Kong and China has attracted many luxury brand names to set up retail outlets and boutiques; and this has enlarged the pie for all players in the fittings industry. The volume of MICE events, exhibitions and other major events such as Formula 1 has also increased tremendously as the two Integrated Resorts open their doors in FY 2010; and this will be a permanent platform for the Company to tap on for recurring revenues. In short, Singapore has changed permanently and the market for MICE events is much larger than it used to be.
Looking at net profits, Interiors makes up the larger bulk of net profits as it has a better profit margin than Museums. Interiors usually makes up about 50% of the profits while Museums takes up about 35% to 45%. The quantum of net profits has been steadily increasing as the volume of Kingsmen’s business grows; and it is a business which can scale up easily without incurring too much additional expenses as it is predominantly a services business.
Net profit margins are higher for Interiors division as well, at 11.3% for FY 2008, compared to just 8.1% for Museums. Integrated Marketing Communications is seeing better margins as it helps to provide total solutions to customers who look for innovative marketing ideas.
Business Unit Geographical Analysis
.jpg)
In FY 2003, Singapore made up the bulk of revenues for Kingsmen (72.2%) while Asia (comprising China at the time) took up 7.5%. United States and Canada took up another 8.1%. Now, in FY 2008, Kingmen’s revenues still stem mainly from Singapore but the proportion has fallen to just 40.6%, while a large bulk comes from Greater China at 23%. Europe still contributed about 11.8% to revenues as Kingsmen designs and exports fixtures out to Europe and this has been a booming business for them. The contribution from USA and Canada has shrunk to just 2.1%, while the Middle East is a new growing geographical segment, contributing 4.8% for FY 2008, up from 1.1% in FY 2006 and 3.8% in FY 2007.
From this simple diagram, it can be seen that Kingsmen has slowly but surely extended its reach beyond Singapore. Although Kingsmen is a home-grown company, it has managed to broaden its services to other regions as well in recent years, with more contributions flowing in from Greater China, and also penetrating Dubai in the Middle East. Kingsmen has also set up offices in Korea to take advantage of opportunities there and their plan is to increase their presence in China and India as well as these are emerging economies and the level of Museums, Exhibitions and MICE events is set to grow.
As Kingsmen expands their footprint across the region, I think we can expect to see them moving into new territories in the next few years as their business is easily scalable with minimal increase in working capital.
Part 3 of the analysis will present competitive analysis for Kingsmen, the first time I am including such a feature. It will give a brief summary of competitors Pico Far East (market leader based in Hong Kong), as well as Cityneon (smaller competitor) and Design Studio (A specialist furniture manufacturer which has overlapping Interiors business with Kingsmen). I will also touch on prospects and plans including the upcoming major events in the South-East Asian region, as well as to comment on how the business model of Kingsmen can help sustain revenues and recurrent cash flows which are vital to the business. I will end off with a wrap-up of the merits and demerits and the rationale for the final decision to purchase shares in the Company.
Saturday, March 20, 2010
Personal Finance Part 16 – The Measurement of Wealth
Traditional methods for measuring wealth are to look at the absolute amount of assets which a person has, and compare this to other well-endowed people, in order to arrive at some basis for comparison and benchmarking. Interestingly, Singapore happens to be the country which generated the highest number of new millionaires, and everywhere one goes, we see beautiful luxury cars and people carrying branded goods. All these serve to reinforce the notion that Singapore is a country filled with rich and wealthy people who are ready to flaunt their assets. But how rich are we in actual fact? This post intends to poke some holes in the theory of “wealth” (note the quotation marks) and how it is generally perceived; and to suggest some measures of my own!
The first quirk of being wealthy is the often quoted “Asset Rich, but Cash Poor” syndrome. Essentially, this refers to a person owning many assets (most often, real estate), but having very little cash savings. Such people often plough a significant chunk of their funds into real estate or other assets, leaving them with very little cash buffer. Others purchase such assets using leverage, and thus have high monthly capital commitments to service. On the surface, these people would be classified as “rich”, but then again they do not really “own” the property or properties as these are all on loan. Eventually, one has to liquidate in order to justify the investment, but lack of liquidity can severely stymie a person’s ability to get cash fast. In the interim, one may suffer from a serious lack of working capital if they do not manage their cash flows well. Thus, this definition of “wealthy” is contingent upon a person being able to manage his cash flows very well, while at the same time juggling a (highly) leveraged Balance Sheet. Risky, admittedly; but sometimes that is the price to pay for being able to tag on a label “Wealthy”; however ephemeral that may be.
Let’s face it: what most people in this world seek is material comforts and financial abundance. Money can buy one many items which can enhance one’s quality of life, and in industrialized, capitalistic countries like Singapore, materialism has gone on hyperdrive. Ask any young person these days on how he measures one’s wealth and he will not hesitate to quote a number, usually in the six to seven-digit range. But the pursuit of absolute wealth is meaningless unless we have an idea of how that wealth is able to sustain us in times of emergency, or in a downturn when we lose our jobs. Therefore, I propose an alternative method of measuring wealth. By the way, this method is not new and has been mentioned on some personal finance websites; however it has generally not been widely acknowledged and recognized because of its difficulty to measure. Wealth should be defined as a function of how long your current savings can last you assuming you lose your income-generation capability.
Sounds harsh? Not really. Let me illustrate with a simple example. Person A has $50,000 worth of savings and his monthly expenses come up to $2,000; while Person B has $200,000 and his monthly expenses comes up to $10,000. Using my definition above (in bold), Person A can last for 25 months without income ($50,000 divided by $2,000) but Person B can only last 20 months ($200,000 divided by $10,000). Hence, Person A is “wealthier” than Person B even though the absolute value of his savings is 66% less than Person B. I am sure we have seen this in real life – people who own many nice cars and gadgets and have a high “maintenance” cost, so in reality they are “poorer” than people who have lesser savings but correspondingly much lower fixed monthly expenses. So, going by this definition, how well do you fare?
Another definition of wealth is that it is an amalgamation of more than just material goods and money. This is a more holistic definition of wealth and seeks to separate it from merely being “rich”, which implies materialistic possessions. Being wealthy in life means having rich and loving relationships, people who love you; as well as fun and laughter every day. In a way, this translates into true happiness – having more than just money and material goods; but also love and life which transcends the cold, grey loneliness of money. Where money is cold (coins), relationships are warm. And this is where we should strive towards.
I guess this sounds extremely clichéd, but I have to say it anyway. Use a different definition of wealth from the rest of the world, and one will always feel rich and successful.
The first quirk of being wealthy is the often quoted “Asset Rich, but Cash Poor” syndrome. Essentially, this refers to a person owning many assets (most often, real estate), but having very little cash savings. Such people often plough a significant chunk of their funds into real estate or other assets, leaving them with very little cash buffer. Others purchase such assets using leverage, and thus have high monthly capital commitments to service. On the surface, these people would be classified as “rich”, but then again they do not really “own” the property or properties as these are all on loan. Eventually, one has to liquidate in order to justify the investment, but lack of liquidity can severely stymie a person’s ability to get cash fast. In the interim, one may suffer from a serious lack of working capital if they do not manage their cash flows well. Thus, this definition of “wealthy” is contingent upon a person being able to manage his cash flows very well, while at the same time juggling a (highly) leveraged Balance Sheet. Risky, admittedly; but sometimes that is the price to pay for being able to tag on a label “Wealthy”; however ephemeral that may be.
Let’s face it: what most people in this world seek is material comforts and financial abundance. Money can buy one many items which can enhance one’s quality of life, and in industrialized, capitalistic countries like Singapore, materialism has gone on hyperdrive. Ask any young person these days on how he measures one’s wealth and he will not hesitate to quote a number, usually in the six to seven-digit range. But the pursuit of absolute wealth is meaningless unless we have an idea of how that wealth is able to sustain us in times of emergency, or in a downturn when we lose our jobs. Therefore, I propose an alternative method of measuring wealth. By the way, this method is not new and has been mentioned on some personal finance websites; however it has generally not been widely acknowledged and recognized because of its difficulty to measure. Wealth should be defined as a function of how long your current savings can last you assuming you lose your income-generation capability.
Sounds harsh? Not really. Let me illustrate with a simple example. Person A has $50,000 worth of savings and his monthly expenses come up to $2,000; while Person B has $200,000 and his monthly expenses comes up to $10,000. Using my definition above (in bold), Person A can last for 25 months without income ($50,000 divided by $2,000) but Person B can only last 20 months ($200,000 divided by $10,000). Hence, Person A is “wealthier” than Person B even though the absolute value of his savings is 66% less than Person B. I am sure we have seen this in real life – people who own many nice cars and gadgets and have a high “maintenance” cost, so in reality they are “poorer” than people who have lesser savings but correspondingly much lower fixed monthly expenses. So, going by this definition, how well do you fare?
Another definition of wealth is that it is an amalgamation of more than just material goods and money. This is a more holistic definition of wealth and seeks to separate it from merely being “rich”, which implies materialistic possessions. Being wealthy in life means having rich and loving relationships, people who love you; as well as fun and laughter every day. In a way, this translates into true happiness – having more than just money and material goods; but also love and life which transcends the cold, grey loneliness of money. Where money is cold (coins), relationships are warm. And this is where we should strive towards.
I guess this sounds extremely clichéd, but I have to say it anyway. Use a different definition of wealth from the rest of the world, and one will always feel rich and successful.
Monday, March 15, 2010
Sun Tzu - War On Business Part 2 (Chinese Cultural Centre)
Part 2 on the Sun Tzu series shows James Sun in Beijing, China, where he is similarly applying the principles of the Art of War veteran onto businesses here. This time, he is focusing on the Chinese Cultural Centre (“CCC”) in Beijing, which is rich in cultural heritage, history and Chinese culture. The CEO and boss is called Feng Cheng (“Feng”) and he is by and large a very culturally rich person who strongly believes in promoting and preserving Chinese culture. However, as the program initially alludes, Feng is not a very business-oriented person and he is not running the CCC as a profit-maximizing business. Hence, James’ job is to review the organization to suggest improvements.
To start off, the CCC is located off a small side street, thus is not easy to find and has no visibility. When James visited the CCC, he found out that it was organizing many activities for participants such as noodle-making workshop as well as tours to the “original” Beijing, which consists of guided tours to parts of Beijing which have been spared China’s rapid modernization. In other words, the CCC’s job was to “sell” culture to foreigners and visitors who are interested to not only find out more about China’s culture, but to also immerse in it and experience it for themselves. However, the CCC had no marketing strategy in place. There was no marketing department as well as many of the contacts and customers were based on word of mouth – not exactly a very effective or wide-ranging method to garner more business.
Feng himself was rather indifferent initially to the state of affairs at CCC. He knew he was losing money on most of the courses and workshops being organized but was content to let them continue running as they were rich in culture, and deep-down he was a cultural person, not a business person. James then went on to interview his No. 2 in charge, a lady called Crystal Ma (“Crystal”), who shared that tour bookings for the ancient city of Beijing made up 90% of CCC revenues, and most of the profits came from organizing such tours (note: no numbers such as pricing of tours or costs were provided). Other workshops like the noodle-making involves many tourists and “novices” but the CCC hired a costly top chef to conduct the training, thus it would imply that the CCC did not mind losing money as long as it retained its “core values” of promoting China culture and practices. Feng is also too much of a “hands-on” man, preferring to sit in on every lecture and workshop to personally oversee it; as well as providing info as a tour guide on the tours which CCC organizes. As the CEO, his time could be better spent on more strategic affairs and he could delegate these tasks to his subordinates.
James then engages the help of Yifei Li, who worked in MTV for 10 years and who understands market demand, culture and Chinese business very well (note: James will always have a local “advisor” to assist him, for Part 1 it was Kenny Yap of Qian Hu). They reasoned that the tours were actually an integral part of keeping CCC alive and profitable; but that the tours should be “re-structured” to make them more tourist-friendly and customer-oriented. The current tours being conducted are somewhat “purist” in nature, with customers being taken on rickshaw rides through narrow lanes strewn with piles of festering rubbish! It was indeed a “down and dirty” experience but when James interviewed some of the participants of the tours (casually), they admitted they did not like the “unique smells” and therefore did not find the tours very enjoyable. However, all agreed that the tours were informative, thus James and Yifei suggested to Feng in the War Room to plan more friendly tours yet retaining the same flavour as the existing tours. Sun Tzu’s saying is “Never Fight Unless You Are Confident Of Victory”.
Feng then starts working on the new tour itinerary and all customers are brought to see an authentic “old” village in the rural part of Beijing, where the villagers put up an energetic performance to entertain their guests. The tour then ends with an old courtyard visit with an old couple, and along the way the tour is peppered with intriguing details on Beijing's old quarters.
The lessons to be learnt are as follows:-
1) Quality of Tours – This had to be maintained as the foundation of CCC and their reputation depended on it. If the tours were too commercialised, then it would lose its culture focus and hence the positioning of CCC would go awry.
2) Unprofitable Divisions – As in any organization, a rigid focus on costs and contribution margin analysis have to be conducted to ensure unprofitable divisions are cut/divested, while nurturing and building up the revenues and business prospects of the more profitable ones. Sometimes it does not pay to over-emphasize on trying to turnaround unprofitable divisions, and one can save costs in the long-term by immediately terminating them.
3) Niche Focus – The CCC was operating in a niche industry, so in a way this limited competition as not everyone has the expertise or knowledge in running a cultural centre. However, Feng has to ensure that a niche focus can allow the organization to be profitable; thus he has to work through the numbers to maximize profits and minimize costs.
4) Delegation of Duties - The CEO Feng should not undertake to supervise every single tour and workshop. Even though he is passionate about the business, his time can be better spent in planning, strategizing and organizing rather than being personally involved. This point stresses the importance of delegation of duties to ensure a lean and efficient organization.
In the end, the new tour had about 30 customers, just a fifth of what was targeted and planned for; but it represented a good start as customer feedback was more positive and the enjoyment factor was definitely there! James Sun mentions another of Sun Tzu’s sayings: “Opportunities Multiply as They Are Seized”, so taking advantage of such opportunities opens up more potential business for CCC to expand their offerings.
One complaint of mine is that no numbers were provided or mentioned at all with regards to costs, margins, pricing and revenues; but this is understandable considering the information is probably private and confidential. Still, one must remember that aside from assessing the marketing and strategic aspects of a business decision, one has to run through numerical projections and forecasts as well. These all contribute to a holistic review of the entire business and makes for better business decisions.
I will be blogging about Part 3 of the series* soon, which is on Plastered 8 business also domiciled in Beijing, China.
*Note that the each episode is shown weekly on Channel News Asia, but I will not be blogging about each episode consecutively; hence there will be a time lag between what is blogged about and the actual airing of the episode. Readers who cannot recall what went on are advised to either record the episode down or try to find it on the Internet (Youtube may be a good place to start searching).
Visit the CCC's website at http://www.chinaculturecenter.org/
To start off, the CCC is located off a small side street, thus is not easy to find and has no visibility. When James visited the CCC, he found out that it was organizing many activities for participants such as noodle-making workshop as well as tours to the “original” Beijing, which consists of guided tours to parts of Beijing which have been spared China’s rapid modernization. In other words, the CCC’s job was to “sell” culture to foreigners and visitors who are interested to not only find out more about China’s culture, but to also immerse in it and experience it for themselves. However, the CCC had no marketing strategy in place. There was no marketing department as well as many of the contacts and customers were based on word of mouth – not exactly a very effective or wide-ranging method to garner more business.
Feng himself was rather indifferent initially to the state of affairs at CCC. He knew he was losing money on most of the courses and workshops being organized but was content to let them continue running as they were rich in culture, and deep-down he was a cultural person, not a business person. James then went on to interview his No. 2 in charge, a lady called Crystal Ma (“Crystal”), who shared that tour bookings for the ancient city of Beijing made up 90% of CCC revenues, and most of the profits came from organizing such tours (note: no numbers such as pricing of tours or costs were provided). Other workshops like the noodle-making involves many tourists and “novices” but the CCC hired a costly top chef to conduct the training, thus it would imply that the CCC did not mind losing money as long as it retained its “core values” of promoting China culture and practices. Feng is also too much of a “hands-on” man, preferring to sit in on every lecture and workshop to personally oversee it; as well as providing info as a tour guide on the tours which CCC organizes. As the CEO, his time could be better spent on more strategic affairs and he could delegate these tasks to his subordinates.
James then engages the help of Yifei Li, who worked in MTV for 10 years and who understands market demand, culture and Chinese business very well (note: James will always have a local “advisor” to assist him, for Part 1 it was Kenny Yap of Qian Hu). They reasoned that the tours were actually an integral part of keeping CCC alive and profitable; but that the tours should be “re-structured” to make them more tourist-friendly and customer-oriented. The current tours being conducted are somewhat “purist” in nature, with customers being taken on rickshaw rides through narrow lanes strewn with piles of festering rubbish! It was indeed a “down and dirty” experience but when James interviewed some of the participants of the tours (casually), they admitted they did not like the “unique smells” and therefore did not find the tours very enjoyable. However, all agreed that the tours were informative, thus James and Yifei suggested to Feng in the War Room to plan more friendly tours yet retaining the same flavour as the existing tours. Sun Tzu’s saying is “Never Fight Unless You Are Confident Of Victory”.
Feng then starts working on the new tour itinerary and all customers are brought to see an authentic “old” village in the rural part of Beijing, where the villagers put up an energetic performance to entertain their guests. The tour then ends with an old courtyard visit with an old couple, and along the way the tour is peppered with intriguing details on Beijing's old quarters.
The lessons to be learnt are as follows:-
1) Quality of Tours – This had to be maintained as the foundation of CCC and their reputation depended on it. If the tours were too commercialised, then it would lose its culture focus and hence the positioning of CCC would go awry.
2) Unprofitable Divisions – As in any organization, a rigid focus on costs and contribution margin analysis have to be conducted to ensure unprofitable divisions are cut/divested, while nurturing and building up the revenues and business prospects of the more profitable ones. Sometimes it does not pay to over-emphasize on trying to turnaround unprofitable divisions, and one can save costs in the long-term by immediately terminating them.
3) Niche Focus – The CCC was operating in a niche industry, so in a way this limited competition as not everyone has the expertise or knowledge in running a cultural centre. However, Feng has to ensure that a niche focus can allow the organization to be profitable; thus he has to work through the numbers to maximize profits and minimize costs.
4) Delegation of Duties - The CEO Feng should not undertake to supervise every single tour and workshop. Even though he is passionate about the business, his time can be better spent in planning, strategizing and organizing rather than being personally involved. This point stresses the importance of delegation of duties to ensure a lean and efficient organization.
In the end, the new tour had about 30 customers, just a fifth of what was targeted and planned for; but it represented a good start as customer feedback was more positive and the enjoyment factor was definitely there! James Sun mentions another of Sun Tzu’s sayings: “Opportunities Multiply as They Are Seized”, so taking advantage of such opportunities opens up more potential business for CCC to expand their offerings.
One complaint of mine is that no numbers were provided or mentioned at all with regards to costs, margins, pricing and revenues; but this is understandable considering the information is probably private and confidential. Still, one must remember that aside from assessing the marketing and strategic aspects of a business decision, one has to run through numerical projections and forecasts as well. These all contribute to a holistic review of the entire business and makes for better business decisions.
I will be blogging about Part 3 of the series* soon, which is on Plastered 8 business also domiciled in Beijing, China.
*Note that the each episode is shown weekly on Channel News Asia, but I will not be blogging about each episode consecutively; hence there will be a time lag between what is blogged about and the actual airing of the episode. Readers who cannot recall what went on are advised to either record the episode down or try to find it on the Internet (Youtube may be a good place to start searching).
Visit the CCC's website at http://www.chinaculturecenter.org/
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