Kingsmen Creatives

[Nick]

Hi Freedom,

I am confused by KC's 3Q 10 statement here -

'As at 9 November 2010, our confirmed sales/contracts have risen to approximately S$233 million, of
which S$215 million is for FY2010. We expect Q4-2010 to be a stronger quarter and FY2010 to be
another rewarding year, barring unforeseen circumstances.'

Does this mean that they will recognize $215 million worth of revenue in Q4 or is this the expected total revenue for FY 10 (barring any contribution from Dec sales) ?

[freedom]

I believe the $215 million should be all the order since Jan 1 of 2010 til the reporting date.

[Nick]

Ok thanks Freedom.

Q4 is usually their bumper year. Hopefully they will make 2010 their 7th consecutive year of increasing their dividends.

[Musicwhiz]

As a shareholder, I am not expecting too much. If they can maintain their final dividend at 2c/share for FY 2010, I'd be very happy already.

[Nick]

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.

---

OCBC downgraded KC to a 'Hold' rating in light of expected earning contraction near term.

http://www.ocbcresearch.com/Article.aspx...0955_61665

[Musicwhiz]

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.

[Jacmar]

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 agree with Nick that there is no moat in this industry. Look at the track record of Pico which just released their results. Net margin ranges from 5-7%. not much room for error.KC aspires to be another Pico in the long run. the only asset is human capital. If you dissect further you will find that this comes in 2 forms:

1. those creative personnel. they are not able to extract much value from their clients if NM is to go by. why?this is because some of the big houses(Prada, etc) have their own designers in deciding how their brands is to be presented in the look and feel. so this reduces KC to become mere contractors and have to bid for these proejcts and hence the low margins.
2. those workers and many of their jobs could be outsource of which some are house internally...these are no different from your neighbour PCK type of contractors.

Having said the -ve, at the right price and good projects available like another shanghai expo,USS etc type, it's worth a buy.

[Musicwhiz]

.......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.

[wee]

What kind of organisations are those?

.......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.

[Musicwhiz]

What kind of organisations are those?

All sorts - Govt, Stat Board, MNC. My point is that there are such people who are willing to be employees so they can have "regular" hours instead of running around like what a business owner does.