Pico Far East Holdings (0752)

[dzwm87]

My observation: The pandemic was already the biggest test for them since they were impacted in almost each part of the world (West, China & SE Asia). It's quite impressive to have emerged from the pandemic bigger than before - they probably won some market share from their smaller competitors. Recent interim DPS already above pre-pandemic interim DPS. Not a lot of other businesses were able to do that. Reflecting back, I would have thought that F&B, retail, tourism etc all were easy recovery play on post-pandemic - turns out most of them are still trailing pre-pandemic revenue.

Of course the common comparison with its SG peer, Kingsmen Creative, who was trying to acquire a good IP before the pandemic and still trying to acquire a good IP after the pandemic. It looks quite clear who the better operator is.

[dreamybear]

2015: price=2.01 closing at 10x PE translates to EPS = 2.01/10 = 0.201 hkd
2024: price=1.85 closing at 7.2x PE translates to EPS = 1.85/7.2 = 0.26 hkd

So over the last 10years, the fact is EPS has grown ~30% 

Thanks weijian & dzwm87 for all the replies.

Given the nature of the business(e.g. brand activation/events industry, 50% of the revenue is deprived outside of China/HK => pretty global, etc) is it realistic to expect its revenue / profit to at least 2x moving fwd ? Granted the mkt expectations is reduced despite the company's recovery to exceed pre Covid-19 but what must happen for expectations to revert back and what is the probability of that happening ? This is esp so if the cause is due to larger macroeconomic conditions at play. I am not an expert & am inclined to think macroeconomic stuff might take years or even decades to play out ?

And given the 30% EPS growth over 10 years, how does Pico compare to say, the following stocks or their underlying business /industry(factoring cyclicality) ?
https://drwealth.com/10-best-performing-...-10-years/
https://www.valuebuddies.com/thread-11221.html

imho, this company is more like a stable evergreen business with dividend yield for OPMIs. It may be a good company to own in the entire stake but as a stock, I am not sure how does it or where does it fall into an OPMI's portfolio - capital gains(short term covid recovery play ?) or dividend yield for retirement portfolio or ??

[dzwm87]

Hi Dreamybear,

I would suppose it has the characteristics of a stable evergreen business. If it's for capital gains, it should have been back then during the pandemic period when you buy alongside with the Chairman

I won't suppose it's an ex-growth. From a quick look, they have been growing presence in the Middle East, something which wasn't in the MD&A during pre-pandemic. The US also seems to be growing larger than pre-pandemic presence - a contention that their pre-pandemic acquisition did work out well for them after all. 

In short, it looks like the cake got bigger and the question is whether steady state post-pandemic DPS will be larger. Interim DPS seems to suggest so.

[weijian]

And given the 30% EPS growth over 10 years, how does Pico compare to say, the following stocks or their underlying business /industry(factoring cyclicality) ?
https://drwealth.com/10-best-performing-...-10-years/
https://www.valuebuddies.com/thread-11221.html

imho, this company is more like a stable evergreen business with dividend yield for OPMIs. It may be a good company to own in the entire stake but as a stock, I am not sure how does it or where does it fall into an OPMI's portfolio - capital gains(short term covid recovery play ?) or dividend yield for retirement portfolio or ??

hi dreamybear,

For those stocks mentioned in the links, I can see a few commonalities:

(a) All of them start from been small caps.
(b) All of them had a business transition - they changed their existing (not working) business model to cater to a new trend, and either onboarded new marque customers or a new blue sea market.

Of course, if there are 10 successful companies with above commonalities, there are another 90 which failed.

--------

IMHO, I feel it is quite pointless to categorize stocks into buckets.

Investing is relatively counterintuitive. Dividend plays don't come from high yielding REITs but from stocks that grow their business over time. Can we have capital gains from REITS (supposedly dividend plays) ? Of course we can. When interest rates get lower, REITs' DI will increase and together with risk free rates reducing, REIT owners will enjoy capital gains. I believe before rates started rising in 2022, the owners of Mapletree suite of REITs enjoyed as much capital gains (or more) than dividend returns. And in another thread, I had shown that Mapletree's true dividend yield is lower than what it is.

dzwm87 has bought out some good points. Is a transition in progress? Is Mr Market slow in closing improving fundamentals (value) and perception (price)? Is there more legs to run? I don't think both of us start by categorizing Pico Far East into some bucket.

[weijian]

PATMI increase for FY24 looks impressive but stripping off one time 71mil gain from disposing an associate (InfocommAsia Pte Ltd in Spore), the improvement in PATMI is in mid teens%, lower than the revenue's high teens increase.

But the company has a couple of things going for it:
(1) Working capital is negative at FY24 (ending Oct). The company continues to demonstrate that it doesn't need that much working capital for revenue increase.
(2) It actually benefitted from the US-China trade war and a lacklustre domestic economy that forced Chinese brands to expand regionally.
(3) I reckon it will be nicely positioned for the upcoming IR expansion in Spore, just like how Kingsmen Creatives benefitted from it almost 15years ago.

Group Achieves Record-breaking Revenue Amid Global Uncertainty

• Revenue increased by 18.8% to HK$6,327.0 million
  
• Gross profit increased by 22.1% to HK$1,942.1 million; Gross profit margin was 30.7%
  
• Profit attributable to owners of the Company increased by 56.8% to HK$357.6 million
  
• Recommended final dividend of HK 7.5 cents, and a special dividend of HK 3.5 cents; Full year dividend of HK 16.5 cents; Dividend payout ratio was 57.2%
  
• Basic earnings per share of HK 28.84 cents
  

As US-China trade has declined, the Middle East and countries such as South Korea, Thailand and Vietnam have emerged as major beneficiaries. Consequently, many of the Group’s regional offices have experienced an increase in business volume, particularly those in Southeast Asia and the Middle East. Also, the Group has responded to these changes by assisting many brands – particularly Chinese brands – to expand overseas into these new or developing markets.

https://www.pico.com/en/news/pico-far-ea...al-results

[dzwm87]

There are a lot of one-off items apart from the associate disposal. Some of the one-off expenses (around HKD 19 million) are also included in the administrative expenses. There is also intangible amortization from the acquisitions done in FY2018. All in all, I have recurring PATMI at HKD 343 million (including amortization) or a 41% YoY increase which is quite impressive given all the broad concerns over geo-political tensions on globalization.

Interestingly, while bad debt allowances have increased, reversals have also increased which tend to be reflective of a more prudent accounting treatment instead of actual receivables being bad.

Headline numbers have also all exceeded pre-pandemic high. Full year DPS of HKD 0.165 (or HKD 205 million), while increased a lot, seems to also be sustainable on the back of a huge net cash pile of HKD 1.4 billion.

Pico Far East has indeed done far much better than Kingsmen Creative.

[weijian]

Hi dzwm87,

Thanks for your notes. I tend to overkill a bit and so wouldn't add back those fees in the PATMI. I would also include amortization inside the "PATMI" as I generally accept GAAP So far, I still don't buy in all the fanciful "non GAAP earnings" that Mgt flashes more than GAAP earnings in their 10k statements.

Agree with you that these guys use conservative accounting. For its US acquisitions made before covid-19, it immediately recognized "additional earn outs" as contingency liabilities on its P/L and B/S. Most of it did not materialize a few years later and was reversed. Another portfolio company of mine, SGX practises similar conservative accounting when it acquired a couple of companies to propel its FX/index business forward - All current and future costs are recognized upfront. In my memory, a negative example would had been Starhub.

The "huge net cash pile" is also a function of negative working capital (-470mil) end FY24. It may be reversed in subsequent periods since the BS is just a snapshot on that particular day. But I do not deny the cash pile is big, although it has mostly been big. However, based on past records, it is reasonable to assume that OPMIs will be able to benefit from it.

10years ago, both Pico Far East's revenue was 1x of Kingsmen Creatives. Fast forward to present, Pico Far East's revenues are now 2x of Kingsmen Creatives. The laws of capitalism and compounding suggest that the gap will only get larger.

[dzwm87]

Looking into the timeline, Pico had the benefit of timing as it seems like the market frowned upon their massive acquisitions before Covid-19. Specifically, most of them didn't survive too except for Infinity Marketing which emerged stronger and larger post-pandemic. For the Middle East growth, either their past decade of efforts bearing fruits or they managed to parlay their relationships with existing clients.

On the flip side, Kingsmen's numbers showed that they continued to rely on legacy contracts in Singapore (zero organic growth), didn't adapt fast enough from their over-reliance in retail interior while over-depended on pursuing IP-owned projects.

Like you said, an interesting comparison because historically, Kingsmen does have very nice ROE and P&L numbers/trends.

[weijian]

Looking into the timeline, Pico had the benefit of timing as it seems like the market frowned upon their massive acquisitions before Covid-19. Specifically, most of them didn't survive too except for Infinity Marketing which emerged stronger and larger post-pandemic. For the Middle East growth, either their past decade of efforts bearing fruits or they managed to parlay their relationships with existing clients.

On the flip side, Kingsmen's numbers showed that they continued to rely on legacy contracts in Singapore (zero organic growth), didn't adapt fast enough from their over-reliance in retail interior while over-depended on pursuing IP-owned projects.

Like you said, an interesting comparison because historically, Kingsmen does have very nice ROE and P&L numbers/trends.

It is all part of the Capital Cycle (popularized by Marathon Asset Mgt). It was boom time between 2015-2017, as (one time) mega projects like Shanghai Disneyland/Wanda theme parks came online and they also engaged Chinese brands venturing overseas. Back then, Pico Far East Mgt may have anticipated that good times will be over soon, and so decided to put focus on overseas expansion (especially US and Middle East). This was in the context of trade war 1.0 as well. Sometimes acquisitions work, sometimes they don't. I believe the key is not to bet the farm, or depend on one for dear life. Bolt-on acquisitions to increase portfolio capabilities (and hence expand wallet share of customer) or new customer relationships probably have a higher chance of future success. But of course, that success is not immediate and may only materialize over the medium/long term of 5-10years.

To be fair to Pico Far East Mgt, they had also rewarded themselves with special dividends which OPMIs came to enjoy too. So, special dividends are back in FY24. Maybe boom times are back?

As for Kingsmen Creatives, its pivot into experiential IP didn't really work out well but that is really on hindsight. I remember that during that period, there was a company called CityNeon (delisted) which was making good money/progress on doing MCU exhibitions. Of course, MCU has already passed the peak of its lifecycle by now. When one goes into experiential IP, a lot of fixed costs are involved to renovate/setup the place. Then one is highly dependent on the IP for relevance to ensure that the operator is able to benefit from operating leverage.

All in all, Pico Far East statement (found in FY24 results) below sums up their evolution (in italics):
Continue our business transformation from the role of vendor to trusted advisor

A vendor is a supplier but a trusted advisor is akin to an asset manager. The former is a commodity while the latter is more sticky.