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).

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

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

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

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.

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

Wednesday, March 10, 2010

My Learning Curve In Value Investing

This post is a somewhat reflective one as I mull over my investing journey after switching over to value investing in late 2007. So far, it’s been a rough ride over the last two and a half years with turbulence rocking stock markets and a “lost decade” appearing for many countries, thus shaking the core of beliefs which many had on the stock market always giving a positive return over time.

For me, this journey is poignant as I slowly but surely learn more about investing, understanding companies, applying lessons learnt, reviewing mistakes and improving my fundamental analysis skills. Somehow, at this point in time, I still feel that I have so much more to learn from many veterans in the field of value investing about how to select good companies which are being offered by Mr. Market at reasonable prices. I have had my share of “hits” and also the painful “misses”, to illustrate to me that there is an almost infinite number of companies out there and one can only do so much with the amount of time he has on his hands. There is always going to be a constant trade-off between quality time with family and loved ones, and time being devoted to the careful and thorough analysis of companies and one’s shareholders and portfolio. It is a delicate balance which I do not wish to disrupt, as the dangers of getting too absorbed in analysis and investing can take a toll on one’s social life and psychological well-being. Life is more than just about making money!

Gentler Learning Curve

Over these 2 years, I have noticed that my learning curve for investing has become less steep, and knowledge acquisition is also less rapid. When I first started out on my journey, my mind was like a sponge and was eagerly soaking up all pertinent and relevant information about value investing. I had a voracious appetite for books on Warren Buffett beliefs and techniques, Benjamin Graham’s margin of safety, Peter Lynch’s classification of companies, Charlie Munger’s thought processes and frameworks and Phillip Fisher’s scuttlebutt, and would also trawl the Internet for bits of information to enhance my critical thinking and analytical skills.

However, as my knowledge base increased, the learning curve also became gentler and I now have the inherent knowledge on valuing companies, understanding their business model and knowing where and what to look for. It has become so much easier and less tedious for me as I acquire more experience and practice in sieving out relevant information and zooming in on important ratios or numbers, and this all helps to reduce the amount of time spent on research and the efforts put into churning up a valid assessment of companies. Back in late 2008, I was struggling with my analysis of Tat Hong and took a whole two months to put together a rational analysis comprising tables with numbers and an analysis of the business (of course, there was much procrastination in between as well!). In 2009 the amount of time required for analysis was narrowed down to a few weeks, and for the most recent Kingsmen analysis it took about a week or so to compile all the numbers, obtain all the facts and put them in my head for churning and analysis. Part of the reason for the faster analysis time is also because I have all the spreadsheet templates ready on Excel to plug in the relevant numbers, and discussions on value investing forums have taught me how to make use of other important metrics and ratios to enhance my understanding of the Company.

Inclusion of Competitive Analysis

One major flaw in my previous analyses of Tat Hong, MTQ and GRP was the lack of a suitable framework and information for analysing competitors, which are a very important aspect of any investment thesis. Previously, I used the Porter’s 5-Forces model and the trend in revenues and numbers to justify a case for a strong competitive moat which was unlikely to be assailed by competitors. This has turned out to be both flawed and also insufficient as I have since found out that Tat Hong does not have such high barriers to entry after all (i.e. there are many smaller crane companies around which can be easily set up to buy/sell/rent cranes and heavy equipment) and that the industry itself is fragmented with no major players. If I had insisted on doing a proper competitive analysis framework back in 2008, I might have weighed the company differently on “cons” and may have been more cautious in my decision to invest in it.

For MTQ and GRP, I had used the stability in revenues and long-term trend of net profits and dividend history to assure myself that both companies had a competitive moat and that they were operating in a niche industry for which their products/services would be in consistent demand. This was also not an ideal analytical scenario to be used as the historical stability of revenues may not indicate future stability, and that I should have instead probed further into each company’s competitors to see how they were doing, and what plans they had for growing their own businesses. In short, I failed the “scuttlebutt” test which Phil Fisher proposed, which is to actively seek out competitors to the companies you wish to invest in and interview THEM on how they view the industry and competition. Admittedly, this would be time-consuming for someone like me with a full-time job.

Some suggestions I received for improving on my competitive analysis was to obtain extract competitor information from analyst reports, and surprisingly this turned out to be a very good source as analysts would normally use peer comparisons to justify their PER ratings. I realized that analyst reports would give a good laundry list of competitors which one could then focus on and drill down further to analyze and compare them on their strengths and weaknesses (thanks for cif5000 for this information). Another area was to do some independent research on the Internet for competitors or to use basic reasoning, observation and common sense to identify competitors. For example, for Kingsmen’s case I had already known about Cityneon being a credible competitor; while Pico Far East’s name can be seen on most major events as I walk around town. So it pays to keep one’s eyes and ears peeled all the time!

Re-defining the Concept of a Good Business

As I scour through the universe of companies listed only on SGX to find those of investment quality, it has also made me slowly change my views on what constitutes an investment-grade business; and what makes up a mediocre business. My original view of good businesses were those with so-called high and unscalable moats as they had high barriers to entry. I was looking for companies which were growing profits quickly and had high profit margins, and did not mind such companies taking on massive debts to fuel their growth. This explains my original investments back in 2005-207 of Ezra, Swiber, Pacific Andes and China Fishery.

That view has been seriously challenged not just by the theory to be found in value investing tomes, but also real-life experiences in observing companies with high debt and supposedly high profit margins come under attack, some either falling by the wayside while others imploded quite spectacularly. I have come to realize that businesses with high capital requirements tend to have less free cash flow available, and that internal cash flows are the best for use in growing the business. Growing through M&A should only be done if a Company has exhausted all its organic growth potential. Also, a business which requires light working capital and yet is able to grow and generate FCF may also qualify as a viable investment-grade business; as opposed to a high profit margin business which requires constant large sums of capex.

Over the years, my focus has also shifted from focusing excessively on the Income Statement, to now focusing more on Balance Sheet strength and Cash Flow quality. This is where my knowledge base as a trained accountant comes in handy in reading and interpreting the financial statements!

More Room for Improvement

To sum up, there is still much room for improvement in my techniques and skills. The mistakes I made over the past few years only serves to emphasize how vulnerable I am, and also to reveal how flawed my original techniques were. Luckily, I am happy to say that I am eager to learn and I am not afraid of mistakes, as long as I do not repeat them! Hopefully, in a few more years, I can look back and report that I made major improvements to my investment style and enjoyed much better success.

Friday, March 05, 2010

Kingsmen Creatives - Analysis of Purchase Part 1

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

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

Introduction – Kingsmen’s Business

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

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

Industry Characteristics and Outlook

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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