Wednesday, September 05, 2018

Kingsmen Creatives - Revisiting The Thesis Part 1

As readers of my blog way back from 2010-2012 would probably know, back then I performed a detailed 5-part analysis on Kingsmen Creatives and posted in on my blog. Of course, much has changed in the last 6.5 years and the Company has also evolved and changed during that time, some parts for the better, and other parts for the worse. My initial idea was to present the thesis to readers and then highlight the sections which had altered or changed significantly since then; but this would have been tough for those who are not familiar with the Company or what they do.

Instead, I thought I would present the Company in a structured manner starting from a fresh slate, highlight the different aspects of it and packaging it in parts to cover it holistically and from all angles. This would cover the basic business, clientele, divisions, financials, margins, competition, strategic and future plans, changes to work culture / physical location, management and other pertinent details, both quantitative and qualitative. I believe that currently, within the investment blogosphere, there is no record of such a comprehensive analysis of a small-cap listed company - some sell-side reports do come pretty close but they generally tag themselves to a "target price" or "fair value" which is as long year. This detracts from my mission of long-term investing and distracts the reader from focusing on what is really important - the essence of what makes a Company great and why it should remain in one's portfolio for a significant period of time, barring a significant deterioration in the fundamentals and financials or a strategic shift in Management's focus and attention.

I will also cover the valuation in the latter part of the posts, but will come from the angle whereby I will comment on existing valuations and give a comparison with available competitors and industry players; but will NOT provide a fair value target price for what I deem is a very long horizon investment. Part of the reason shall be explained in the appropriate section on "valuation", but it should be easy enough for the reader to comprehend that with limited available information, building a robust financial model of any sort is close to impossible. Instead, I invest because I assessed Management's quality, the strength of the business and the robustness of the planning and steps taken to grow the business. These will be detailed in posts which will be split into parts, as follows:-

Part 1 - Introduction and Historical Background
Part 2 - Financials, Margins and Cash Flow
Part 3 - Divisional Analysis
Part 4 - Management Quality and Candour + Order Book
Part 5 - Competition and Industry Outlook
Part 6 - Future Plans, Catalysts and Strategies for Growth
Part 7 - Valuation, Sentiment and Risks

Part 1 (this post) will give a brief and concise introduction to the Group and its divisions, and also mention some of Kingsmen's clientele. Part 2 will delve into the financial highlights and the numbers which matter, including margins, cash flow and dividends. Part 3 will focus on the divisional analysis for Kingsmen, including the sales mix and margins for each division over the last 8 years. Part 4 will discuss the qualitative aspect which not many may talk about - Management candour and quality and also changes in the Management over the years, including succession planning and how staff are compensated. Part 5 will talk about Kingsmen's competitors - with a brief mention of Pico Far East (listed in Hong Kong but not strictly a competitor in many respects) and also Cityneon Holdings (which has been in the news a lot lately on their stellar results and the acquisition of their fourth intellectual property ("IP")). Part 6 is where I talk about the future for Kingsmen and their plans for growth in a new direction, with the Feb 2018 announcement of their tie-up with Hasbro to do up the NERF franchise. Part 7 ends off with a valuation discussion on Kingsmen (various methods to be considered) and also the overall sentiment surrounding the Group.

There may obviously be some overlap between sections which cannot be avoided, as some parts may reference other parts in an attempt to explain the overall thesis and why the Company remains compelling. As an example, during the divisional analysis I would also inevitably mention how each industry is faring in relation to the divisions, while Part 5 would also talk about this but also present trends in each industry and how they would impact Kingsmen and their competitors.

Disclaimer: Please note that all content which will be displayed here is obtained from public resources, including but not limited to sell-side reports, the Company's annual report(s), discussions with the Management at AGMs and also a study into the industry characteristics and competitive analysis through other pertinent reports. This is NOT intended to be a recommendation as to the merits or demerits of this investment and should NOT be construed as a recommendation to either purchase, hold or sell this security. This merely serves as a record of my investment thought process, how I view and analyze information, my thoughts on the Company (and industry) and how I see the future panning out.


Kingsmen Creatives is a leading communications and design group established in 1976 with 21 offices around Asia serving global clients. It has four main divisions namely Exhibitions and Thematics ("E&T"), Retail and Corporate Interiors ("Interiors"), Research and Design ("R&D") and Alternative Marketing ("AM").

The Group is a market leader in the MICE industry, MICE being the "Meetings, Incentives, Conventions and Exhibitions" space, and helps in the organization of events such as Singapore Air Show, Art Stage Singapore and Formula One Night Race just to name a few events. E&T division is also responsible for installations at museums in countries such as Singapore and the Middle East, as well as for theme parks such as Universal Studios Singapore (back in 2009) and Disneyland Shanghai. Their work is also displayed at places such as the Singapore Fintech Festival 2017 in Singapore, Sourcing Taiwan 2017 in Taiwan, Hyosung at Textile India 2017 in India, BMW Motorrad at Thailand International Motor Expo 2017 in Thailand as well as Seoul Lounge at Seoul Biennale 2017 in South Korea.

For Interiors, Kingsmen is well-known for their high quality of work and also on-time delivery for their clients, which span a very broad range from AIA, Fendi and SingTel, to Ralph Lauren, Tiffany and Co and Van Cleef and Arpels. Many of these are well-known international brands and have been clients of Kingsmen for many years, forming their repeat customer base which provides a recurring form of revenue. For Interiors, other clients would include Armani Exchange, La Perla, Michael Kors, Zara, Massimo Dutti, Ted Baker and Longchamp.

For more details and information on Kingsmen's work and clientele, please do download their Kingsmen Watch 2018.

R&D and AM are divisions which add value and support the main divisions of E&T and Interiors, and these would include events and road-shows and also pop-up stores which are a feature of the new retail landscape. More will be mentioned later on regarding the evolution of the retail landscape which is a key feature of how Kingsmen is adapting, under Part 3 where I will do a detailed divisional analysis for Kingsmen on their two main divisions.

Historical Background

Kingsmen was established 42 years ago with founders Benedict Soh and Simon Ong, each of whom owns around 25% of the Group. They started out doing fit-outs and brands and stressed on delivering a high quality of work even as the industry was saturated with many competitors who offered the same types of services. Kingsmen differentiated themselves by being more than just a "contractor" - instead they focused on on-time delivery, quality and slowly built up more and more scale within the business. This allowed them to push ahead in terms of market share and also build up good branding for the business - all these moves attracted the attention of international brands which proceeded to do business with Kingsmen as it saw that the Group could deliver the level of quality required for international brands to expand into the Asian region.

When Kingsmen started out, they even did the Orchard Road Christmas decorations and Benedict mentioned that he was proud of being able to achieve that milestone despite tough weather and traffic conditions! Though they have come a long way since then, the Group did not forget its past and still did up the Christmas decorations for 2017 and also recently won the bid for both the National Day Parade 2018 and the historical upcoming National History Event 2019 (which will showcase the bicentennial founding of Singapore since the year 1819).

The next Part 2 of this comprehensive analysis will talk about the financials for Kingsmen and I will present a summary of key financial numbers and ratios over the last 8 years (2010-2017). Discussions will also centre around margins, balance sheet strength, debt, capex, cash flow and dividends.


Dan said...

Hi MW,

I sold off Kingmens after seeing the recent results.

From the headlines, things look like to have bottomed out.

However, on closer inspection of P&L, 1.2m (out of 2+m) profit came from Forex gains.

What I find disturbing is that lack of mention of this one time gain by the management in their press release.

I also noted they now do general announcement for their contract wins, but off my hand I can say these wins are they having been winning all the while (SG F1). I dont see them as catalyst.

K W Chan said...

Where is Kingsmen’s competitive advantage that put it way above its rivals?

Musicwhiz said...

Hi Dan,

Thanks for the comments. Actually, Kingsmen (like any other business) is subject to forex gains and losses from time to time, as they have operations in countries outside of Singapore. Some companies like Boustead Singapore do mention this, but as it's a normal operating cost of doing business, and this can sometimes be either a revenue or an expense, I don't see any particular need for Management to highlight it.

You are correct on the contract announcements being part of normal business, as Kingsmen is an order-book based business. But what I usually review are the type of contracts and the profile of the clients - in this case the Singapore Bicentennial Celebration is something out of the ordinary and highlights the Group's profile and track record. Disneyland Shanghai was something of a coup too as previously Kingsmen had done only USS. They are not catalysts per se but they do display the Group's growing influence in thematics and also in North Asia.

Musicwhiz said...

Hi Kit Whye Chan,

Thanks for your comment. I can think of three aspects which makes Kingsmen different from its rivals (i.e. contractors).

1) Ability to do roll-out Management - As Kingsmen has branches in other countries, this means that they can serve international clients who would wish to simultaneously roll-out their stores across different countries in Asia. This is a capability which smaller contractors do not have as most have only local operations and may not have project teams which can coordinate so well.

2) Handling and managing thematic contracts - Theme parks are a new area of growth for Kingsmen since they clinched the USS contract back in 2009. This qualifies them to work on other theme park parcels of work and they recently also completed work on Disneyland Shanghai. Being successful in this area puts them in the same league as only a few other players in the region (one of them being Pico Far East) and allows them to continue to bid for other theme park contracts. Smaller contractors without the skills and track record would not be allowed to bid for such contracts.

3) Ability to partner with a global toy powerhouse Hasbro - Kingsmen conceptualized the NERF FEC and pitched it to Hasbro, and got the latter's buy in when they announced the partnership in Feb 2018. Kingsmen has the ability and competence to pull off the FEC concept and also has the Balance Sheet to be able to fund it, thereby making them the preferred partner for an international renowned toy brand. Other contractors would not have the financial muscle and also the ability to conceptualize, market and execute this effectively and this is where Kingsmen stands out among the rest.

Hope the above explains, thanks.

Dan said...

Hi MW,

We can only agree to disagree on that. When Forex gains is most than half of your quarterly, I dont see why it shouldnt be stripped out.

And if we strip out Forex gain for Q2, yoy we are still about close to 50% drop in profit.

Not as rosy as what the management portray.

Musicwhiz said...

Hi Dan,

Sure, no problem at all. Agree with the removal of the forex gains. But note too that staff costs was up +8% yoy and that contributed to the poorer performance. I believe they are building up their staff strength for their NERF venture and also for the bidding for other theme park contracts.

So my view is this year should be less than impressive, but if they are building up capabilities for the future, I am OK with that.

TheValueFund said...

MW, I recently chanced upon your reactivation. Great to see u back.

Don't know if u recall me but I used to read and interact with you back with uncle CW and bullybear when you started. I published under the name of TheValueFund.

Our situations and portfolios have changed much over the 6+ years. I now publish my portfolio as below. Hope to keep in touch and engage u in value investing.

Musicwhiz said...

Hi TheValueFund,

Very nice portfolio and great returns you got there! I think I can also learn a lot from your portfolio and the picks that you made.

Thanks for stopping by and I think I do recall the interaction but it was a very long time back!

Sillyinvestor said...

Hi just a suggestion,

Wouldn't it be a great idea to integrate the few parts that are more of your analysis and cut down on info that are easily available through Google?


More eager Dor your final 2 esposides, cannot win

Musicwhiz said...

Hi Sillyinvestor,

Yeah I think I got your point. But the introduction portion is just to give some background on the Company - the "meat" so to speak is from Part 2 through 7. Sorry but I guess everyone has to bear with Part 1 being the "obvious".

Am also trying to think of the best way to splice up all the information so that each part is neither too long nor too short.

But thanks for your suggestion once again.