Kingsmen – Let’s Be Rational

Kingsmen Creatives has been embroiled in financial abnormalities involving two subsidiaries, Kingsmen Kingsmen Beijing Co., Ltd and Kingsmen Exhibits Pte. Ltd. A statement was released by the company yesterday morning at 0725 after four days of trading halt. The case has since been reported to the Minister of Finance according to the Companies Act, by the external auditors of the company. Commercial Affairs Department has also been notified, by the Audit Committee of the company. In this post, I’m not going to have a re-hash of what had happened. You can grab hold of today’s Business Times and read the article entitled “Kingsmen caught up in allegations of financial irregularities” for an easier understanding of what had happened. This post will touch on my own thoughts surrounding this saga and also include some of what was reported in the Business Times article. Such occurrences test our fortitude as investors and I’m taking it as a positive experience for me to grow as an investor.

During the days leading up to the announcement, many were predicting that there would be a buy-out of the company by another company since Kingsmen is a company with excellent track record, fundamentals and business prospects. However, it turned out to be something on the other end of the spectrum. Something not very well-received by the market – financial irregularities. The stock price of Kingsmen plunged once trading was lifted yesterday to a low of $0.695 before closing at $0.725. This was a drop of 8.8% compared to 11th January’s close (the last trading day before the long halt).

Just like any negative news, people’s reaction will be, “Sell first, think later!”, hence the plunge in stock price. Rationality and logic are most often thrown out of the window during such instances. (That is why Efficient Market Hypothesis does not hold water!). During a mass exodus from the market, great opportunities are usually presented. Warren Buffett once said that, “Uncertainty is the friend of the buyer of long-term values.” We should ignore the cacophony and rationalize if we have an opportunity, amid this uncertainty.

Kingsmen as a whole is not fraudulent. Senior management did not know about the personal guarantees and they were not involved in the incident. The two employees who had given personal guarantees were too eager in their job. They wanted to look good themselves. No money from the company’s coffers was put into their own pockets so there was no misappropriation on their part. Kingsmen also had to make advance payment as it had lots of jobs to carry out and also in my opinion, to maintain a good working relationship with them. I think this saga happened during the initial phase of Universal Studios Singapore project where many parcels of projects were won by Kingsmen and they were huge projects. If the subcontractor stops work suddenly, Kingsmen will be affected drastically.

I’m happy that this incident was found out and reported as this incident also serves as a warning to other potential perpetrators. The internal controls of the company will be tightened further as said in the company statement – “The Board will be appointing a reputable international accounting firm to conduct a complete review of the Group’s internal controls and to develop a comprehensive Group Risk Assurance Framework to enhance and strengthen the Group’s internal controls and risk management.”. Going forward, I’m sure Kingsmen will be more prudent. No key employees were reportedly sacked and thus, does not impact Kingsmen’s provision of services in the future.

Benedict was also dejected that this has happened to Kingsmen. He said in the Business Times article, “We have to work hard and take action to repair this setback.” Those are strong words. I believe in Benedict and I’m sure he will set things right. From my interactions with him during the Annual General Meetings, he seems to be a person with integrity. He is also a major shareholder of the company and being the founder, he will not let things go down the drain so easily.

Always remember that businesses involve risk and no business is perfect. When investing, we always have to have a long-term view of the market. In a book called “Don’t Sweat the Small Stuff”, the author mentioned to see a “problem” in terms of five years into the future and think, “Will this really matter five years down the road?”. I believe the long-term prospects of Kingsmen are still intact. The company has had a strong working relationship with its clients. The order book is strong and I don’t think it will be affected by this issue.  Kingsmen is vying for many theme park projects in the region. The MICE industry in Singapore is still bustling with activities. Orchard Road revamp is still ongoing with new shopping centres coming up. More suburban malls are slated to open to transfer the crowd from Orchard Road. Clients like Robinsons, Uniqlo and H&M are expanding. If I were a client of Kingsmen, I would not be too concerned about the financial irregularities but rather be more concerned about the quality of project done by Kingsmen and whether Kingsmen upholds what it promises. More quality clients coming on board lately is a testament that Kingsmen has been doing an excellent job for its clients.

Going forward, with CAD’s investigation, more stories can unfold. Who knows, the investigation may possibly open up a Pandora’s box of more fraud that were covered up. That’s the worst case scenario. The stock price most probably will take a bigger hit if that materializes (remember the earlier axiom of “Sell first, think later”?).

At the current price of $0.725, the dividend yield is 5.5%. With a steady free cash flow so far, solid business fundamentals and rosy future prospects, I believe the dividend yield on cost will only go higher. Investors can also look for a larger margin of safety of say, 6.6% dividend yield, to provide some room for error in judgment. “A great investment opportunity occurs when a marvellous business encounters a one-time huge, but solvable, problem.” – Warren Buffett. I strongly believe this is a one-time temporary event and it’s a great opportunity to take advantage of.

In conclusion, as investors, we need to have a long-term outlook in the market. Always remember that investing is most prudent when it’s business-like. Analyse a set-back rationally and we can discover opportunities. Yes, I understand the eminent CAD investigation sounds scary. It’s unlike other one-time events like earnings misses, product launch failure, etc but I believe Kingsmen will emerge stronger from this. Mr Market has become manic-depressive, are you going to take advantage of it?

P.S. Please exercise due diligence. The above are merely my thoughts. I may be biased as I’m a shareholder.

Kingsmen – Stable Growth Fuelled by Competent Management

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The following is a guest post by Tan Si-Rong. Si-Rong is a retail investor with close to 10 years of experience trading in Singapore equities. He has worked in UOB-Kay Hian as an Equity Sales Dealer and at Singapore Tourism Board as an Assistant Manager, specializing in the Meetings, Incentives, Conferences and Exhibitions (MICE) sector.

History

Founded in 1976, Kingsmen is a communication design and production company that specializes in the following business segments; Research & Design, Retail & Corporate Interior, Exhibitions & Events, Thematic & Museums, and Alternative Marketing.

Growth since IPO

Since Kingsmen’s successful public listing in 2003, its stock price has risen to four times the IPO price of SGD0.195. The same can be said for its revenue; from a mere SGD60 million back in 2002, it has increased steadily to SGD260 million in 2011 due to strong demand for Kingsmen’s services in growth markets such as Greater China, India, Middle East etc. Till date, Kingsmen has handled many large-scale projects such as Universal Studios Singapore (USS), World Expo Shanghai, LVMH boutique stores etc; all adding credentials to Kingsmen’s ability to provide quality services to clients.

Founders and Philosophy

The success story for Kingsmen thus far can be largely due to the two founders of the company, Executive Chairman Benedict Soh and Group Managing Director Simon Ong. Both of them feel strongly in the need to constantly engage clients with total experiential solutions, and delivering excellence in all things that Kingsmen undertakes. The company’s name is also derived from this ideology, in view that the staffs are the “men” who serve the customers, who are regarded as “kings”.

Both founders of Kingsmen are true believers in the power of synergies. While Benedict, who was recently awarded the Lifetime Achievement for Outstanding Contribution to Tourism award by the Singapore Tourism Board, is the one who possesses business acumen. Simon, on the other hand, is the one with both the designing brain and creative juices in him. Together, they see the need to constantly broaden earnings base, enhance capabilities and expand key accounts and client to ride on the growth opportunities presented to the company. Together, they teamed up to shape what Kingsmen is today.

Outlook

Despite the challenging global economic situation ahead, Kingsmen should be able to continue doing what it does best; and that is to provide value-added services, and enhance the experience of all clients, without affecting bottom-line. The air of optimism can be attributed to the strong pipeline of projects, such as Hong Kong Disneyland extension, Sotheby’s Visitors Centre and Offices, Marina Bay Sands (MBS) and USS extensions etc, which will keep Kingsmen busy for now. Kingsmen may also be tendering for thematic projects like Shanghai Disney, and there is high chance that it will be offered the tender, after its successful execution of the Hong Kong Disneyland project earlier on.

With Singapore maintaining its position as the Top International Meeting City for 5th consecutive year by the Union of International Associations 2011 and Asia’s Top Convention City for the 10th consecutive year by ICCA Global Rankings 2011, it will bode well for Kingsmen’s Exhibition and Museums segment, which is also the key growth driver of sales and earnings for Kingsmen.

Fast Forward

My parting words for you? With attractive dividend yield of more than 5%, rising consumerism and booming MICE sector, all things seem to be moving in the right direction for Kingsmen. It remains to be seen if there is any further upside for the stock price of Kingsmen in future.

Kingsmen Annual General Meeting – FY 2011

I had the opportunity to attend Kingsmen Creative’s AGM on 26th April 2012. This year, the AGM was held at a new room on the ground floor near the main entrance. This room was previously part of a showroom showcasing Kingsmen’s designs to potential clients. In the previous year, the AGM was held in another room in one of the upper floors. That room has since been converted to a design studio due to the growth of Kingsmen. When I was signing in my attendance before entering the room, Andrew, the Group General Manager noticed me and he jokingly said, “You also need to sign in ah?”. I was humbled by that comment. It’s not as if I’m a substantial shareholder of the company but he surely made me feel at ease. I also asked him how come the AGM has shifted to a new place. He said the other room on top has been converted to a design studio and he joked that next year, the AGM might have to be held outside the building under a tentage. The growth of Kingsmen surely bodes well for the shareholders.

Before the AGM kicked off, Andrew, gave a snapshot of how Kingsmen fared for the year. The AGM proper began after that. I will summarise below the salient points of the AGM.

  • One shareholder asked about the competitors of Kingsmen. Benedict Soh, the co-founder and Executive Chairman,  said that the competitors vary for each division. He also said something very significant. He said that Hans Bruder, Managing Director of Octanorm, told him, “No other company in the world has the same breadth of services as Kingsmen”. I felt elated at hearing this. Ben joked that now he has someone to quote instead of him always saying that Kingsmen is a strong company.
  • 70% of Kingsmen’s clients are repeat customers. Ben said that clients come back to Kingsmen just like how patients always visit the same family doctor for illnesses. Word-of-mouth recommendations have also helped Kingsmen’s business.
  • Revenue contributions from Singapore takes a huge percentage of total revenue. Many of the projects done overseas are still billed in Singapore as the Singaporean teams are involved in the project overseas even though the clients are overseas clients.

Honestly, there weren’t many questions asked during the AGM this year unlike the previous year. I learnt more about the business last year than this year. Probably, the rising share price placated the investors present and thus, didn’t bother asking much questions.

After the meeting, a few of the shareholders and I had the chance to chat with Simon Ong, the other co-founder and Group Managing Director. I asked about the succession plan for Ben and himself. He said that the systems and processes are in place and the 2nd echelon of managers are already trained and are capable. If they were to leave tomorrow, the business will still run as usual. Both of them are taking a step back to look at the various competition so that they would not be taken by surprise if something crops up. Simon also said that shares are issued as bonuses to employees so that they have a belonging to the company. Almost 100% of the senior managers and almost 60% of total workforce (including overseas employees) own shares of Kingsmen. Furthermore, Simon added that training is very much emphasized in Kingsmen. This was the first time I chatted with Simon and I realised he is really affable and knows his stuff as a businessman.

Kingsmen at Invest Fair 2012

I was at Invest Fair 2012 today and heard Andrew Cheng, Group General Manager of Kingsmen, give a talk entitled “Experiencing Kingsmen”. I took away some important key pointers and they are summarised below:

  • Kingsmen was involved in Hollywood Dreams Parade in Universal Studios Singapore (USS) and were also largely involved in the show choreography. A new area of business for Kingsmen might be show production.
  • Kingsmen did the Visit Britain 3D installation in Singapore, Khalifa Observatory Gallery in UAE, Transformers Retail and F&B Outlet in USS, etc in the past year
  • Current works-in-progress include Interpretive Media in Gardens By The Bay, Fushun Dreamworld, Hongkong Disneyland, Ocean Kingdom, Imagic
  • Pitching for Disneyland Shanghai, Money Kingdom Beijing, etc
  • Barriers to entry to this business is low. Any staff of Kingsmen can resign and easily start a business like Kingsmen. However, the question is can the new competitor prise away the high end clients that are being served by Kingsmen currently. Kingsmen has scalability too.
  • Margins for the theme parks business should get better moving forward as Kingsmen is past the learning curve that it was hit by when it was first involved in USS
  • If they were to do merger and acquisition, it will involve companies that are into areas that Kingsmen is currently not into

A video of the Hollywood Dreams Parade that Kingsmen was involved in:

The following photos are courtesy of Musicwhiz:

Kingsmen FY2011 Results Analysis

Kingsmen Creatives released its Q4 and FY2011 results on 27th February 2012 and this post will look into the results in detail.

Income Statement

The revenue for FY2011 increased 11.7% from $233.6 million in FY2010 to $261 million in FY2011. The cost of sales increased more than revenue at 14.5% when compared with FY2010. This caused a dip in gross profit margin from 27.3% (FY2010) to 25.5% (FY2011).

The net profits for FY2011 increased 8.4% from $15.1 million in FY2010 to $16.3 million in FY2011. The staff costs have increased 6.9% when compared with FY2010. The net profit margin was slightly lower in FY2011 at 6.3% when compared to FY2010’s figure of 6.5%. The margins have dipped in FY2011 due to lower margins from interior fit-out projects as well as on fixtures export.

Balance Sheet

The trade receivables has increased from $68.9 million in FY2010 to $88.7 million in FY2011. This is an increase of 28.7%. The revenue increase was only 11.7%. The trade receivables increase caused “Cash flow from Operations” to go down year-on-year as we will see later. The increase in trade receivables was mainly due to more billings in 2nd half of FY2011 as the projects undertaken were mostly completed since then. Long-term debt is very manageable at $2.1 million.

The ROE decreased from 26.4% in FY2010 to 24.4% in FY2011. The reason being the equity increased much more than the net profits when compared to the previous year. The increase in equity can be attributed to more cash in the coffers and an increase in trade receivables.

Cash Flow Statement

Cash flow from operations has gone down 36.7% from $20.3 million in FY2010 to $12.9 million in FY2011. The plunge is mainly due to increase in trade receivables. The capex is at $2.8 million. Therefore, the free cash flow stands at $10.1 million for FY2011.

Outlook

As of 25th February 2012, the order book stands at $106 million, which is 26.1% higher than in FY2010.

More theme parks all over Asia and beyond are being developed. Recently, Kingsmen won a $18 million contract by Universal Studios Singapore. It also won contracts for Hong Kong Maritime Museum and the Sotheby’s Visitor Centre in Hong Kong.

The interiors division is also expected to do well. The interiors business remains buoyant in Singapore and the division expects to be involved in upgrading and new projects in suburban malls and along the Orchard road belt. Two new shopping centres in Orchard, namely 268 Orchard Road and Orchard Gateway will be opening and Kingsmen may win projects to fit-out some of the shops. More global brands are coming into the region and having done considerable amount of projects for big clients, Kingsmen can continue riding on this wave. H&M and A&F stores which opened last year were fitted-out by Kingsmen. When other global brands look to set foot into Singapore, they will be looking at how its rivals are faring and who did the fit-outs. If the fit-outs are of high quality, these new brands would want to engage the same established company (Kingsmen) to fit-out its own shops. In that way, quality can be assured and the brand does not have to source for contractors.

Dividends declared for Q4 is 2.5 cents/share. Overall, I feel Kingsmen has great opportunities going forward to expand its business and create more shareholder value.

Kingsmen’s The Edge Article

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Kingsmen was featured in 9th January’s edition of The Edge magazine. Thanks to Musicwhiz that I got to know about this article. Kingsmen was previously featured in the now-defunct Pulses magazine in 2010 and you can read it here in case you missed it. I will summarise the main points of the article in this post.

  • Kingsmen is still involved in Hong Kong Disneyland and it will go on until 2Q2012. 2011 is slightly better than 2010 and Benedict is pretty optimistic about 2012. The retail market in Asia is growing fast and China’s luxury market is still hot.
  • Pico’s earnings of $33.9 million in FY2010 came from its investment properties and if this is stripped away, Kingsmen is comparable as at last year. Kingsmen’s earnings of $15 million in FY2010 was generated entirely from its core business.
  • Kingsmen is selective about the job it undertakes to ensure all the work it takes on actually contributes to the bottom line instead of just focusing on expanding top line, which is easy.
  • Benedict predicts the company can double its top line in the next five years due to the export market and the potential to expand its business in the 18 countries in which it operates.
  • Benedict also sees lots of room for growth in Singapore from the remaking of Orchard Road. ION will be three years old this year and every three years, they will renovate and tenants will change. He also sees growth in Indonesia as foreign brands are slowing going in and in Malaysia, there are jobs at Starhill Gallery.
  • Benedict added that there is plenty of growth potential as the market in China and Middle East is huge.
  • Benedict doesn’t want to make big promises and says it doesn’t make a difference if the share prices goes up or down. However, he is concerned if the company is well run and if the shareholders are taken care of. He said, “At the back of our mind, we don’t want to be pressured or pander to market expectations”.
  • Benedict and Simon are grooming a second echelon of managers to take over the business. Anthony Chong, Alex Wee, Krez Peok, Andrew Cheng and Roy Ong are likely to play a key role in the company’s future.
  • Benedict and Simon would consider merging with other companies if that would bring in synergistic business and enable the combined equity to grow faster.
  • It is worthy to note that the two founders have not sold their stakes in their company at all since Day One. There have been offers to buy over the company but they are not selling.

Visit to H&M Flagship Store

Yesterday evening, I visited the H&M flagship store at Orchard Building which was fitted out by Kingsmen  after two previous futile attempts to enter it. The main reason why I wanted to go down was to take a look at the quality of work done by Kingsmen. Another reason obviously was to shop around for fashionable clothes.

I wanted to go down with my friend on grand opening day on 3rd September but it was mad-packed and who wouldn’t have guessed it, right? On the second attempt, exactly a week later, the queue outside the store was not as long but it was still long that we forwent queuing up. It was my lucky break yesterday. There was a queue but the queue was moving very fast and my friend and I queued for less than one minute. You can see a short queue to the left of the picture below.

A shot of the inside from the outside:

Once we entered, the store was quite crowded and there wasn’t much room to move around. The whole design and layout of the store was spartan yet elegant. There are a total of three floors. Ladies wear covers the first two floors and men’s wear and kids wear occupy the third floor. The clothing shelves were packed close together, probably to maximize the floor area. Below are pictures of the first floor, the ladies section, from the escalator:

Next, pictures of the men’s section. In the second picture below right in the middle, you can see the cashier queue snaking. H&M’s cash register must be ringing none stop from the fashion-crazy crowd and the never-ending queues. There was a queue even for the fitting room, as seen from the third snapshot below.

Lastly, a shot of a design near the escalators with a very nice caption on it:

From the queues from the first day till now and with all the hype, H&M’s decision to open their first store of Southeast Asia in Singapore has proven to be an excellent decision. This bodes well for Kingsmen as H&M may engage it again for other stores around the region and the world. I’m looking forward to visiting the Abercrombie & Fitch outlet when it opens towards the end of 2011.