Kingsmen Creatives

(28-01-2011, 11:16 AM)Musicwhiz Wrote:

(28-01-2011, 11:11 AM)wee Wrote: .......those that are really good will want to be owners themselves.

I don't quite agree with this. I know many people who are very senior and very good at what they do in an organization, but they are content to be superb employees instead of venturing out on their own. They still earn a huge lot and get a lot of job satisfaction, without taking on the risk and sweat of running a business themselves.

I agree with MW on this. I know a lot of senior folks who work in different fields and are high flyers earning big bucks. Talk to them and you would realize that they enjoy the corporate culture. These are the people who are meant to work in organizations, and they will thrive in there. They have no desire or wanting to start their own business.

Civil Servants, Corporate execs and entrepreneurs are usually different breeds. Not saying that none of them can switch to the other, but that is more a rarity.

(28-01-2011, 11:37 AM)wee Wrote: But certainly design businesses, in construction, renovation, etc... industries with smaller players and smaller barriers to entries, there is much higher chances of people who will want to strike out themselves. I encounter much more of these.. designers who set up their own design firms, top fund managers who set up their own hedge funds, etc.

I think the failure rate is also significant for people who strike out on their own as they do not have the scale and thus margins to compete against the larger players. Since the industry already has thin margins, venturing out on your own is tantamount to suicide unless you have a lot of contacts AND a lot of funds. Of course, I understand that there are many cheap and niche designers who can survive on a small clientele, but they are never able to achieve the size and scale to effectively compete against the big boys like Kingsmen and Pico FE.

I think you misunderstood me.

My point is , no matter what industry, there are people who prefer to work in an organization and be a salaried person for life. They enjoy the corporate life and the politics etc...

They have no real desire to leave the monthly salary and strike out on their own even if there is a lucrative opportunity outside. If they didn't find an opportunity for growth in the org they are in, they will look for another org.

The entrepreneur and the salaried person are two different species.

(28-01-2011, 11:37 AM)wee Wrote: Maybe I should clarify myself - I was talking in the context of businesses like KC. I agree its probably quite difficult for a top civil servant from, say HDB, to become an entruprenuer. What are the chances of setting up another HDB in SG?

In other cases, say top banker with a commercial bank, its also difficult for them to set up another commercial bank even if they want to. these are the industries where there are high barrier to entries which made it much more difficult for startups.

But certainly design businesses, in construction, renovation, etc... industries with smaller players and smaller barriers to entries, there is much higher chances of people who will want to strike out themselves. I encounter much more of these.. designers who set up their own design firms, top fund managers who set up their own hedge funds, etc.

Anyway, we are digressing. My point is, human capital is a weak source of moat.

And there is only one Goldman Sachs.

(28-01-2011, 11:28 AM)flinger Wrote:

(28-01-2011, 11:16 AM)Musicwhiz Wrote:

(28-01-2011, 11:11 AM)wee Wrote: .......those that are really good will want to be owners themselves.

I don't quite agree with this. I know many people who are very senior and very good at what they do in an organization, but they are content to be superb employees instead of venturing out on their own. They still earn a huge lot and get a lot of job satisfaction, without taking on the risk and sweat of running a business themselves.

I agree with MW on this. I know a lot of senior folks who work in different fields and are high flyers earning big bucks. Talk to them and you would realize that they enjoy the corporate culture. These are the people who are meant to work in organizations, and they will thrive in there. They have no desire or wanting to start their own business.

Civil Servants, Corporate execs and entrepreneurs are usually different breeds. Not saying that none of them can switch to the other, but that is more a rarity.

OCBC downgrades Kingsmen Creatives (5MZ.SG) to Hold from Buy “in view of its hazy near-term outlook.” The house cuts its fair value estimate to $0.65 from $0.82.

The house says Kingsmen has been growing exponentially since its listing, with earnings growth recording double-digit rates between 2003 and 2008; “we believe that this trend may reach a plateau in FY10-FY11, and are projecting a mild contraction in FY10 profits followed by flat earnings growth in FY11.”

The house trims FY10 and FY11 estimates by 14% and 23%, respectively, to reflect a more cautious stance; “the group’s ambition of doubling its revenue in five years now appears stretched.”

It cites potential headwinds as a high-base effect after record high earnings in FY09, a gap in orderbook (with the bulk of revenues from Universal Studios Singapore already recognised) and arbitration proceedings against a sub-contractor.

However, the house adds, “beyond near-term headwinds, we remain sanguine over Kingsmen’s longer-term prospects...in addition, dividend yield is relatively attractive at around 6%.”

Shares are untraded at $0.570.

http://www.theedgesingapore.com/the-dail...-buy-.html

A big player in practically ANY industry has an advantage. Moat from scale, bargaining power, ability to attract talent etc. But this is another topic altogether.

I find it quite sad when an industry depends on thin margin as a barrier to entry. I know it may happen in real life, but I would want to avoid investing in such industries. Its like saying, "I work in role that pays me peanuts and it is so shitty that only dumb people will take it on and ... hey, that is my competitive advantage!"

(28-01-2011, 11:41 AM)Musicwhiz Wrote:

(28-01-2011, 11:37 AM)wee Wrote: But certainly design businesses, in construction, renovation, etc... industries with smaller players and smaller barriers to entries, there is much higher chances of people who will want to strike out themselves. I encounter much more of these.. designers who set up their own design firms, top fund managers who set up their own hedge funds, etc.

I think the failure rate is also significant for people who strike out on their own as they do not have the scale and thus margins to compete against the larger players. Since the industry already has thin margins, venturing out on your own is tantamount to suicide unless you have a lot of contacts AND a lot of funds. Of course, I understand that there are many cheap and niche designers who can survive on a small clientele, but they are never able to achieve the size and scale to effectively compete against the big boys like Kingsmen and Pico FE.

Here's my take on Kingsmen's competitiveness.

They have two main operating segments: Interiors Design (ID) and Museums and Exhibitions (ME).

In the ID sector, it is very very fragmented. Any PCK-type contractor can gather a few good men, some sub-contractors and bid for a tendering retail outlet. Areas where you can try to differentiate are reputation, an aesthetic eye (if the client wants that), speed, and price. There is no real advantage to being big, in terms of asset or revenue size, and there's no high capex to start with, so it's hard to stand out permanently. Reputation is probably the only factor which can provide any long-term advantage. It's easier to find people cheaper and faster than you, and some clients may have their own inputs on design.

Here, Kingsmen targets the higher-end clientele. This is where their reputation is a good edge and they should work tirelessly to protect the Kingsmen brand. This would lead to higher rates of clients returning for subsequent contracts, as well as referrals.

In the ME sector, it is also fragmented, but perhaps less so. The same distinguishing factors remain, but here, reputation perhaps stand out more. Clients have bigger budgets and less room for error as mistakes cannot be easily corrected, if at all, since some events are one-off. ME is mostly about pomp and extravagance, spending on the aesthetic to please crowds. Saying you're a cheap and fast contractor probably means less than saying you have a good track record of carrying out similar projects with success.

In the ME sector, I think Kingsmen has made a wonderful move to push aggressively for the USS contract, albeit at lower margins. It is harder to enter such a segment for smaller players like Cityneon and Communications Design. Kingsmen made the leap and if USS are a satisfied customer, this not only enhances their brand, it could lead to new contracts and referrals as well.

In summary, one edge Kingsmen can have is in its brand, and its personnel. But I see the personnel edge differently. It's less about creativity or artistic sense than it is about networks and salesmanship. In Kingsmen's industries, salesmanship and network-building have a synergistic (for lack of a better word) relationship with the company's brand, such that a salesman would enhance his salesmanship and networks if he joins a big company, and the big company would only have good networks and sales if they have good salesmen. So I think both the company and the personnel have good reasons to hold on to one another. This perhaps can be applicable to some other industries as well.

I know building an edge around a brand sounds amorphous, but I think if you think about how humans work and how sales are conducted, there is real value there in some cases.

(28-01-2011, 11:52 AM)wee Wrote: I find it quite sad when an industry depends on thin margin as a barrier to entry.

Could you perhaps explain this statement, please? So far I do not know of any industry where thin margin can be used to justify barrier to entry.

(28-01-2011, 11:54 AM)D123 Wrote: In summary, the only edge Kingsmen can have is in its brand, and its personnel. But I see the personnel edge differently. It's less about creativity or artistic sense than it is about networks and salesmanship. Salesmanship and network-building have a synergistic (for lack of a better word) relationship with the company's brand, such that a salesman would enhance his salesmanship and networks if he joins a big company, and the big company would only have good networks and sales if they have good salesmen. So I think both the company and the personnel have good reasons to hold on to one another.

I know building an edge around a brand sounds amorphous, but I think if you think about how humans work and how sales are conducted, there is real value there in some cases.

Thanks D123... I've learnt something new about KC from your post.

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(28-01-2011, 12:00 PM)Musicwhiz Wrote:

(28-01-2011, 11:52 AM)wee Wrote: I find it quite sad when an industry depends on thin margin as a barrier to entry.

Could you perhaps explain this statement, please? So far I do not know of any industry where thin margin can be used to justify barrier to entry.

I think i got that impression from your earlier post when you mention that talented people are not keen to venture out because of this barrier (thin margin). If I've mistaken, I apologize.

Lets agree to disagree.

(28-01-2011, 10:12 AM)Musicwhiz Wrote:

(28-01-2011, 09:41 AM)Nick Wrote: I guess the main issue with KC is its lack of moat. There is no expensive asset, lock-in revenue period, human capital is the main asset (which can easily be poached) etc. I hope the industry's ROE tanks so that it doesn't attract larger vulture which can easily over-run KC position in this growing sector.

Just curious - why would expensive assets and lock-in revenue create a "moat"? Most probably if you have expensive assets they would be highly specialized and require constant maintenance & upgrading (i.e. capex). Lock-in revenue like charter contracts does give visibility but does not tell you much about the customer strength in repayment and the margins, so that is also a potential area of concern.

Human capital is not so easily poached as the Company may have built a culture of loyalty into their key employees by granting share options or other perks.

I find the OCBC report (as usual) too short-term. All 3 factors it mentions in "headwinds" relate to near-term (2011) earnings visbility and even the arbitration proceedings is a short-term consideration. It goes on to conclude that just because of these factors, Kingsmen's goal of doubling revenue in 5 years time "appears stretched". I rest my case.

I would classify KC's industry as one of high return - low capex. This is naturally one of the best industry to be in since the cash-generating ability should be in excellent shape. But let's not forget that such industries will not exist in such a shape for long if there is no viable moats.

Examples:

1) Specialized Service Companies - law firms, consultants etc

Why: The bulk of their asset lies in their human capital. There is no need to spend big $$$ to double their profits.

Moat: Size and prestige. Moreover, they tend to adopt a 'partner-associate' model which promises huge rewards to those who succeeds. Difficult for a small firm to attract talent.

2) Management firms - REIT Manager, Trust Manager etc

Why: There is no need to spend big $$$ to increase their AUM. Net-working is the key here.

Moat: Lock-in revenue. Very difficult to remove a REIT Manager from power.

3) Technology firms - Microsoft, Apple etc

Why: Patented software can generate huge amount of cash-flow.

Moat: Patents

I think you get the picture - there is a viable moat in each of these companies which ensures the situation can remain at it is.

In KC (and Pico etc) case, the moat lies solely in their human capital (their designers etc). The only way to retain human talent is through a good remuneration package. But this is one of the weakest moat since a larger and more established player can easily offer more $$$. A bidding war will reduce profits and hence ROE in the long run. We are already seeing this happening slowly - gross margins are declining slowly.

A high return - high capex companies offers an 'automatic' moat by virtue of its capex.

A good example would be the local commodity firms. I would consider the likes of Noble and Wilmar to have sizable moats. It would take billions of dollars and years before any competitor can achieve a similar scale as them. I can't build another mine in Japan but I can easily poach a few talented engineers to beef up my design company.

Naturally, you may wish to disagree. I don't mind buying KC (it is in my watch-list) due to its good cash-flow and yield. But to claim that KC has strong moat is hardly accurate.

Just to add, along the lines of D123.

1. If you are a rich individual requiring banking services, you go to Switzerland. You won't bank in some under-developed Asian countries no matter you are told what low price and services available.
2. If have money and your life is at stake, you will find the finest doctor. This could be based on heresay from your fellow rich and capable friends, or some other reputable magazine/newspaper. Once you go and you are happy, you continue going rather than experiment with some roadside sinseh.
A lot of these are by reputation. Good services cannot be easily quantified or attacked; and therein is part of the moat once you get there. For marketers, the strength of the brand!

The sum of Kingsmen (marketers+sales+designers+contractors+coordinators [who knows who supplies what and where]) could be bigger than each individual alone. Such a team would be difficult to assemble and keep together - the moat.