Sunday, March 20, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 3

Part 3 of this comprehensive analysis will focus on the industry outlook for Kingsmen, in terms of its M&E division and Interiors division, and to review if recent trends in South East Asia and China in particular are helping Kingsmen to grow and expand the business. There have been many news reports in Singapore of increase MICE activities being planned since the opening of the two IRs, and the exhibitions and events scene is also becoming more vibrant as a result. Due to the planned revamp of the Orchard belt, there are also opportunities existing for Kingsmen to overhaul and refurbish malls in that stretch. Beyond our shores, news reports have also mentioned theme parks and amusement parks being opened in many parts of South-East Asia to capture the tourist dollar, as more and more people flock to Asia as a result of the economic fallout in America and Europe.

Tourism and MICE Outlook

For Singapore, our Singapore Tourism Board (STB) has a very ambitious plan – it wants to increase tourist arrivals to the 17 million mark by the year 2015. This was unveiled by Minister for Trade and Industry Mr. Lim Hng Kiang on January 11, 2005 in this speech, in which the aim was to increase tourism receipts to S$30 billion as well. Of course, at the time, the hot debate which was going on was whether or not to construct the Integrated Resorts, along with the associated casinos and MICE facilities. We all know what happened and now Singapore has some of the most advanced facilities for MICE as well as a booming IR to cater to tourists for all purposes (gambling, shopping, events and exhibitions). The STB 2009 Tourism Report found here mentioned that visitor arrivals stood at 9.7 million for 2009, a dip of 4.3% over 2008. 2010’s full year figures are not out yet on the site, but the reason for the dip in 2009 over 2008 was due to the global economic recession. In fact, 2010 numbers should show a sharp increase as the economy has rebounded after nearly falling off a steep cliff. Page 7 of the same report shows that roughly 27% came for MICE events, down from 30% in 2008. This still represents more than a quarter of all visitors or about 2.5 million visitors, not a small number indeed! With the full suite of MICE facilities up and running at MBS, Kingsmen would have more opportunities to tender for exhibitions and conventions for 2011.

An October 15, 2010 article in the Straits Times stated that MICE events have increased by as much as 20% over the past year as compared to 2009, as the economic recovery took hold and also due to the opening of RWS and MBS, says industry observers. The pie has enlarged for all players in the MICE industry and will give a boost to business in years to come, as the addition of the IRs has increased the exhibition space to 180,000 square metres from the previous 135,000 square metres. Industry players also agree that “the outlook looks bright” for MICE, with new shows debuting here including the inaugural Art Stage Singapore, a high-end art fair at MBS and the World Chinese Entrepreneurs Convention at Suntec Singapore. All this increased activity can only mean better business for all MICE players, of which Kingsmen is one.

Theme Park “Boom”

Theme parks is another buzz phrase which is going around in Kingsmen’s industry. With Asia’s middle class booming and China and India churning out more (and faster) billionaires than anywhere else in the world, South East Asia is set to be the next big boom in terms of tourism and is seen as the place where a lot of monies will flow, whether it be for infrastructure projects, investments or tourism projects. With rising wealth and consumption patterns also comes the need to build more places for the money to flow to, hence there has been a flurry to build more theme parks in Asia, beginning with Disneyland in Hong Kong and Universal Studios in Singapore.

I refer to an article in Channel News Asia dated September 19, 2010 which mentioned that Asia’s growing middle class is fuelling a “boom” in theme parks. To summarize the article, it mentioned that Asia is fast becoming the new destination for tourists due to cheaper air travel (i.e. budget airlines) and growing affluence in countries like Indonesia, China and India. The theme park phenomenon is shifting to Asia, says Christian Aaen, Asian regional director of research firm AECOM Economics, which specialises in entertainment and leisure industry analysis. Universal Studios has signed a deal to build its largest theme park (larger than all four of its current theme parks combined) in South Korea (ready by 2014) at a cost of 2.67 billion dollars. Disneyland is also setting up in Hong Kong (as mentioned) while Legoland is building a theme park in Malaysia to replicate famous landmarks using their trademarks bricks. Kingsmen’s press release has also mentioned a slew of other projects coming up over the next few years in Asia, namely Kidzania in Malaysia, Samsung Everland in Korea and Fushun Dreamworld in China. All these upcoming theme parks give the impression that there is a lot of activity in the near term which will benefit all players and there is optimism that Kingsmen, with their recent experience garnered from working on USS, will be able to capture significant parcels of work to add to their order book.

Interiors – Singapore, China and Malaysia

As mentioned in Part 2, the Interiors Division is the division with the higher margin compared to M&E, but this Division also has the lowest barriers to entry. However, with Kingsmen focusing on international brand names and their roll-out programmes, this means that they can target the mid to high-end premium segment of the market and thus build some form of competitive moat with their expertise and delivery timeliness.

A news article in November 2010 announced that luxury brand H&M was opening a store in Singapore at Orchard Road in late 2011, and it has been the case that many international brands are setting up shop in Asia as Asia’s wealth has increased over the years and the people’s spending power has also grown in tandem. Orchard road malls are getting facelifts more often now as more and more malls are being sold to REITs, which are managed by REIT managers. These managers will want to engage in asset enhancement works to increase rental yields for their unit-holders, and so will do more frequent and extensive refurbishment as compared to previously (before the mall was sold to a REIT). New malls are also coming up in the heartlands such as the recent Nex mall in Serangoon and Bedok Point in Bedok (Bedok’s first mall), and all these provide opportunities for Kingsmen to capture business. Though one may argue that the bulk of FY 2010’s revenues for Interiors came from the fitting out of about 30+ stores at Marina Bay Sands Shoppes, there remains ample opportunities for Kingsmen to fit out retail interiors within Singapore.

In China, Kingsmen is planning to increase the capacity of an automated facility (i.e. factory) there to cater for growing demand for retail fixtures fabrication. More on this in the next section.

Interview with Kingsmen on Industry Prospects

To add on to the news reports and industry updates which I had managed to collect over the last couple of months, I also gave a call to Kingsmen and spoke to its General Manager Mr. Andrew Cheng about Kingsmen’s prospects, and I shall briefly mention those which relate to the industry and their business divisions:-

1) Roll-Out Management services are increasing for Kingsmen’s international clientele, as more and more companies expand and set up shop in Asia. This is Kingsmen’s competitive edge as many small players and even local outfits (for example in China) cannot co-ordinate a simultaneous roll-out for retail outlets located in different regions and/or countries.

2) Retail fixtures export business is growing and makes up about 10% of Interiors’ revenue. Most of the fixtures are exported to the USA.

3) The new Beijing facility as mentioned in the press release actually relates to the expansion in capacity of an existing facility and it will enable Kingsmen to grow their revenues with regards to their China operations. The estimated capex is small (about S$100,000) and the facility will perform fabrication for fixtures used in fitting out. The rate of expansion has accelerated in recent years due to the Beijing Olympics in China as well as the recent Shanghai Expo, which increased demand for such services.

4) Kingsmen envisions a lot more growth traction in India and North Asia, which is why they had increased their stakes in the companies located in these two regions. The theme park industry is booming and many more international clients are seeking a “one-stop shop” for their fitting out solutions. Kingsmen is active not just in getting repeat clients but is also increasing their client base at the same time through winning new customers.

Part 4 will touch on Kingsmen’s competitors, namely Cityneon (listed in Singapore) and Pico Far East (listed in Hong Kong) and compare some key ratios, as well as to assess if Kingsmen has an edge over them. Some mention will be made of their different business models and focus so as to draw some comparisons and to assess if Kingsmen can hold its own against them.

Monday, March 14, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 2

Part 2 of my Kingsmen analysis will focus on the segmental discussions, namely on two aspects – divisional revenue and margin analysis using segmental information; as well as segment analysis by geography using information provided by the Company. The segmental analysis and breakdown numbers can be obtained from Note 13 (Additional Information) to be found in Kingsmen’s FY 2010 financial announcement for FY 2010. The other numbers were obtained from my analysis of purchase. Geographical revenue spread can also be obtained from the same note but is presented in a separate table for clarity and ease of discussion and analysis.

Divisional Revenues

Taking a look at the table above, I’d like to first focus on the divisional revenues breakdown. One can see that historically, Kingsmen’s Interiors division has always had the greater share of the revenue pie as compared to Museums & Exhibitions (M&E). M&E division started to catch up during FY 2008 and FY 2009 due to the opening of the IR, and the subsequent mega-contracts from USS, and also the Formula One race. This tipped the balance somewhat, with Interiors and M&E almost having equal share in FY 2008, to M&E taking the lion’s share of revenues for FY 2009 (due to USS contract as previously mentioned). However, for FY 2010, some normalization occurred and the Interiors division once again became the largest revenue contributor at 49.6%, with M&E coming in rather close at 44.7%. The absence of large contracts for M&E division enabled Interiors to catch up in terms of revenue, but there was still enough business for M&E as Asia had many events going on such as Shanghai Expo, YOG, Formula One as well as exhibition projects such as Food and Hotel Asia 2010 and Singapore Airshow 2010, to name a few. Interiors division, I believe, had a boom year due to the many retail fittings done at Marina Bay Sands Shoppes, with Kingsmen helping to fit out more than 30 shops. The good news is that Interiors also helped to fit out boutiques in China as well as India and Vietnam for internationally-renowned clients such as Tiffany and Burberry. Note that many of these clients are repeat customers and Kingsmen stands to benefit from their expansion plans as they roll out retail outlets in key countries like China and Vietnam. Roll-out Management services constitute a large portion of Interiors’ revenue and cements the long-term relationship between Kingsmen and a client, therefore a lot of the “value” in Kingsmen is not just in delivering quality products and finishings, but also in the relationship and network building with these repeat clients. It is noteworthy that the retail export fixtures business is also gaining traction, with more exports being made to USA/Canada; these are all classified under “Interiors” and have the same margins as the fitting out business.

Though Research and Design (R&D) and IMC tend to be smaller contributors to revenue, thee divisions’ revenues have also increased in tandem with the increase in activities for the Group. But their proportional contribution to total revenue remains small and is unlikely to be significant going forward. More will be mentioned on R&D and IMC in a later section on net profit margins.

Net Profit Contribution by Division

The net profit contribution is somewhat more interesting, as it does not follow too closely to revenue contribution proportions by division. Interiors has always been contributing to more of the profit pie, as compared to M&E. Only FY 2009 was an exception as the large USS contract propelled profits at M&E division to S$9.3 million, which was 47% of total profit versus 44.2% for Interiors. Yet if we compare FY 2009 M&E contributed 56.8% to revenues while Interiors contributed just 38.7% to revenues; so this would imply Interiors was more profitable at the margin level as compared to M&E. This phenomenon presented itself once again in FY 2010’s numbers, because even though Interiors only had a marginally higher proportion of revenues compared to M&E, net profit for Interiors took up 57.6% versus 35.8% for M&E. This seems to indicate that Kingsmen would be better off focusing on growing their Interiors division as it is more profitable than M&E, but the flip side of the argument is that M&E contracts are much larger and “prestigious” and so far have also opened up more doors (i.e. customers) for Kingsmen. Scenic and Thematic works, which is grouped under M&E, is a growing segment for the Group as Asia takes centrestage in hosting mega-events and governments spend large amounts of money on theme parks to attract tourists. According to Kingsmen, the initial contract (parcel of work) tends to be the largest but has lower gross margins (<20% for USS due to deployment of more staff and tight deadlines), while future variation orders and refurbishment/overhaul works would be smaller in terms of size and scale but command better gross margins.

Research and Design and IMC

R&D has traditionally only been a minor contributor to the Group’s revenue and net profit, but note that net margins are very high for this small division and revenue will grow along with the growth in Group revenue. IMC, however, was burdened with higher depreciation expenses due to the purchase of a large panel screen worth about S$500,000, and so reported a small net loss for FY 2010. I was assured by the Company that IMC would have been profitable if not for the higher expenses relating to this purchase.

Net Margins by Division

Looking at net margins, it is interesting to note that M&E division usually has lower net margins as compared to Interiors. After discussion with Andrew Cheng of Kingsmen (General Manager), it would seem that both M&E and Interiors actually garner the same net margins, but M&E typically requires more manpower deployment and more intensive preparations, hence the margins are eroded as a result. Interiors had an 8-year average net margin of 6.9%, while M&E’s 8-year average net margin was just 6.5%. If averages do not tell the story, then look at the last 3 years and you can see that Interiors posted better net margins of close to three percentage points better than M&E.

Surprisingly, R&D has traditionally shown very strong margins and FY 2010 was no exception, with net margins touching 21.6%. Since FY 2006, net margins have been very healthy for this division, while the opposite can be said for IMC as net margins are traditionally very thin and are very erratic. As mentioned by Andrew of Kingsmen, IMC had bought a large screen costing about S$500,000 and the depreciation basically wiped out all the profits for IMC division. One point he did mention was that both divisions have to work together to deliver a total solution to the client, hence the reason for not divesting IMC due to weak margins. Even though the two divisions are small contributors to revenues and profits, nevertheless they have a part to play in the overall scheme of things at Kingsmen.

Geographical Breakdown of Revenue

Singapore has traditionally been Kingsmen’s mainstay in terms of geographical revenue spread. The proportion had actually been dipping since listing from a high of 72.2% to 40.6% in FY 2008, then FY 2009 came along and the huge USS contract pushed the proportion up to 60.3%; but I see this as more of a one-off event and will not persist. For FY 2010, the % dropped back to 46.9%, if only because of the large number of store fitting outs they did for Marina Bay Sands Shoppes (about 30+). Otherwise, the trend for Kingsmen (also verified by Andrew) is that they will be relying much less on Singapore for revenues moving forward, and their aim is to focus their attention on North Asia (namely China, Taiwan, India, Hong Kong, Korea and Japan) as these countries have much more opportunities and business potential.

Malaysia’s contribution has also dropped in recent years below the 10% mark. DMG’s report did mention that malls in Malaysia are ready for sprucing up and Kingsmen may see opportunities there for Interiors division. Andrew affirmed this by saying that the life cycle of malls is about 3 to 4 years, and many malls in Malaysia are due for a revamp. Hence, there should be opportunities there for Kingsmen to grab some work.

The region to take note of is China, where revenue contribution started off at 2.8% in FY 2006, and which has jumped by leaps and bounds to 22.8% for FY 2010. Kingsmen reiterated that there is a lot of potential for China market as many international brands are setting up shop there, and many spanking new malls are being built to cater to the nouveau rich and rising middle-class. The economic boom in China has attracted many international brands there and they have the need for roll-out Management services (i.e. co-ordinating simultaneous store openings in various regions of a country, or across different countries). Theme parks are also being planned and China also had recent mega-events such as Shanghai Expo and Beijing Olympic Games. Kingsmen are setting up a facility in Beijing to cater to increased demand (more on this in Part 4.

Fixtures export is also a growing business and Kingsmen mainly export to USA, hence the contribution from USA/Canada is 7.4% for FY 2010, up from 2.2% in FY 2009.

Associated Companies – Comments

Kingsmen had increased its stake in Kingsmen Fairtech in India (additional 15.5% investment completed on May 6, 2010) and also Kingsmen North Asia in China (additional 11.7% to 92.2% in December 2010). This reflects Kingsmen’s confidence in these two countries being growth engines for the Company moving forward, and therefore the Group wishes to recognize greater contributions in terms of % from these two regions. For FY 2011, Kingsmen will be recognizing greater contributions as a result of the stake increases.

Regarding the loss-making associates, Kingsmen Middle East LLC’s poor performance is mainly due to the recent Middle East troubles, and the Middle East contributes only a small portion of revenues to the Group. Kingsmen has offices in Dubai, Abu Dhabi and Qatar. Kingsmen Nikko is also not doing well mainly due to the sputtering Japanese economy. However, things should start to look better for FY 2011 in terms of associates’ contributions.

Part 3 will touch on the industry outlook and I will present news on MICE, Interiors, tourism and some other pertinent trends in order to present an objective view of the industry. Discussions will branch out from there.

Tuesday, March 08, 2011

Kingsmen Creatives – FY 2010 Comprehensive Analysis Part 1

This is intended to be a rather comprehensive analysis for Kingsmen Creatives, and will cover many aspects of the Company including financials, segmental breakdown, geographical revenue contribution, qualitative aspects, industry outlook, competitive landscape, prospects, plans and other pertinent facts. I guess it was conceived after reading through the recent reports which OCBC, DMG and Kim Eng had come up with on reviewing Kingsmen’s FY 2010 results. Most of them did a one to four-page write-up which I felt did not sufficiently cover all aspects of the Company, and thus could not lead shareholders and investors to make an informed decision on the Company. Of course, my review and analysis is NOT expected to be objective (as I am a shareholder), but it serves to at least highlight the many issues facing the Company and hopefully provide explanations and in-depth discussions on them.

Part 1 shall focus on the numbers aspect, and will cover the Profit & Loss Statement, Balance Sheet and Cash Flow Statements. 8-year historical numbers will be presented, as well as dividend payment history for Kingsmen since listing in FY 2003. Part 2 shall cover segmental analysis and associated companies, including discussions on stake increases for Fairtech and North Asia; as well as how the other associated companies will fare in the coming years. Part 3 will delve into the industry outlook, and provide some recent news articles which highlight the MICE industry, tourism industry and also outline plans for retail malls in Singapore, Malaysia and China. Part 4 will touch on the competitors for Kingsmen, namely Cityneon (a smaller local player) and Pico Far East (a much larger Hong-Kong listed rival), and attempt to dissect their numbers and place them side by side with Kingsmen. Part 5 shall end off with a discussion on the investment merits and also draw in some insights of mine which I formulated with respect to my investment in the Company.

Disclaimer: Please note throughout that ALL information here is solely provided by myself and should not be relied on as investment advice; therefore please verify facts and numbers independently and do not use this blog or any associated charts/figures/tables as a definitive source of information. The blog owner shall NOT be responsible for any factual errors or any losses arising from any reader relying on the information herein to make financial decisions. To summarize, when in doubt, please consult a qualified professional.

Profit and Loss Analysis

The above table only shows the key metrics and numbers which I have served to highlight, and discussion on the Income Statement should extend beyond the 8-year numbers shown above. Note that revenue for FY 2010 had dipped marginally by -2.8% to S$235.2 million from S$242 million a year ago; but was still respectable considering about S$78 million of last year’s revenues consisted of a large contract from Universal Studios Singapore (“USS”). The more important fact was that COGS dropped by a larger -7%, resulting in an increase in gross profit of 10% from S$59.5 million to S$65.4 million. Gross margin increased from FY 2009’s 24.6% to FY 2010’s 27.8%, and if you glance at the 8-year history of Kingsmen since listing, this gross margin was equalled only in FY 2003 (listing year) and bettered in FY 2008 (at 30.7%). Whether Kingsmen can maintain this gross margin moving forward is in question, but assuming the thematic projects it takes on involve smaller parcels of work, then gross margins can be sustained. One of the major gripes of the large USS contract was that gross margins were negatively impacted.

The bottom line was, however, impacted by the fact that other income was slightly lower, while staff salaries and related expenses rose by 8.1% and other expenses rose by a larger 17%. If we break down the reasons, it was mainly due to the increase in staff salaries of about S$2.6 million, as well as higher operating lease expenses of S$300,000 and a write-off for their fire-gutted Malaysian factory premises of S$400,000. All these added up to increase expenses to the tune of about S$4.4 million. Share of results from associates also dropped 74% to just S$87,000 from S$332,000 and was another disappointment which caused the profit attributable to shareholders to increase just 1.1% from S$14.9 million last year to S$15.1 million for FY 2010.

Historical PER remains relatively low at about 7x, but this is probably reasonable considering Kingsmen’s growth prospects are not expected to be strong, and competition in their arena is also keen. The next section will discuss salient aspects of the Balance Sheet, while also commenting on the net cash per share and using that to compute valuation metrics for ex-cash.

Balance Sheet Review

With a glance at the above table, one can immediately conclude that revenue growth seems to be tapering off in FY 2010, which explains why there is a drop in valuation for Kingsmen’s forward prospects. Of course, as mentioned before, if we stripped out the USS contract, then Kingsmen’s revenue growth would be more gradual and steady, rather than seeming to “spike” in FY 2009 and level off in FY 2010.

Trade Receivables has actually dropped about 9% from last year while Trade Payables has remained fairly constant. Trade Payable days has increased to 81 days (a good sign) while Trade Receivable Days has fallen by 7 days to 107 days (still high, sadly). The cash conversion cycle is a negative 26 days which is an improvement from FY 2009’s -40 days, but this still has more room for improvement. Of course, one can argue that it could be a matter of the timing of receipt and payment of cash which resulted in such ratios being generated, and this is one factor which readers should take into account as well.

The current ratio for Kingsmen is at its highest level in 6 years, at 1.45. The Group also has a high level of net cash at S$24.6 million, and net cash per share stands at 13 cents. Return on equity, the all-important metric, stood at 26.4% for FY 2010, dipping from 33.2% in FY 2008 and 28.7% in FY 2009. Still, at above 25% and with an increasing shareholder’s equity number (note that FY 2010’s equity number is about 33.6% higher than that of FY 2008), this is still a very respectable performance, and done without excessive leverage.

Interestingly, ex-cash historical PER for Kingsmen for FY 2010 is at 5.34x, one of the lowest as compared to prior years. This means that if you strip away the cash per share, in essence you are getting the entire business at just about 5.3x price-earnings; implying that you can make back your investment in just 5.3 years time with the business’ current profitability and cash flows.

Cash Flow Statement Analysis

Kingsmen always had very strong operational cash flows and very little need for capital expenditure (“capex”), so I would expect this to continue into the foreseeable future unless they suddenly had a drastic need for capex. Thus far, the only large capex item I see on the near-tern horizon is their announced plan to build an automated facility in China to be ready by 2H FY 2011. Otherwise, their capex requirements have always been low as Kingsmen’s core assets are its people and the brains behind their ideas and designs. It is, after all, a design company!

It can be seen that operational cash flows improved drastically for FY 2010 as compared to FY 2009, as cash flowed in from the completed USS contract which was booked as a Trade Receivable as at end-FY 2009. S$20.3 million worth of operational cash inflow was booked, while capex only amounted to S$6.2 million (and this includes two warehouses built in Selangor after fire destroyed the existing one), resulting in free cash flows of S$14.2 million. Financing cash outflows were low due to absence of repayments of loans to banks, unlike in FY 2009 when S$12.4 million was repaid to banks. Dividend payments formed the bulk of financing cash outflows, and this is likely to continue into the foreseeable future as Kingsmen usually is able to generate cash in excess of what it requires for working capital and capex. In fact, Kingsmen’s net cash level is at its highest since listing at S$28 million, which probably also explains why they can afford to pay a special dividend of 0.5 cents per share to celebrate Kingsmen’s 35th Anniversary!

Dividend History

From the above table, it can be seen that Kingsmen’s dividend history has been consistent and increasing. From paying just 0.75 cents per year (once a year) in FY 2003, Kingsmen has now increased it to 3.5 cents per share twice a year (excluding the 0.5 cents special dividend). I believe this is because Kingsmen’s business model does not entail high levels of working capital, and neither does the business require constant and consistent spending on capex to keep up with competitors and ensure the business stays viable. Staff costs are, however, an area of concern as Kingsmen has to continually tap on good talents to ensure it can innovate and deliver the best service to clients.

Part 2 will deal with segmental breakdown and margin analysis, and provide some discussions on these aspects.