Kingsmen Creatives: A gem in the making?

Some of you may have noticed a spanking new attraction that just opened at Marina Square mall, that of NERF Action Xperience (NERF AX). For those who are unfamiliar with the brand, NERF is one of Hasbro Inc’s best-selling toy brands. NERF AX is a family entertainment centre (FEC) concept that was co-conceptualised, developed and constructed by Kingsmen Creatives Limited in partnership with Hasbro.

But let’s dig a little deeper and find out more about the company that’s behind this hugely popular attraction. Kingsmen Creatives started out in 1976 as an events and exhibitions company that also dealt with interior fit-outs for retail and commercial clients. The group counts major brands such as Coach, Fendi, Ralph Lauren and Tiffany and Co as its clients, and has also done fabrication and installation work for theme parks such as Universal Studios Singapore and Disneyland Shanghai.

More recently, the group was involved in the conceptualisation of the Bicentennial Experience held at Fort Canning Park and was also involved the set-up of the Christmas decorations for 2018.

Challenges facing the business

Kingsmen has been facing challenges to its Interior Fit-Out business in the last few years. As can be seen in the graph above, revenue has been relatively steady and FY 2018 even saw it hit a 5-year high, but the gross profit has been stagnant while net profit has been on a steady decline since FY 2015. In fact, net profit more than halved from a high of S$19 million in FY 2015 to just S$8.1 million in FY 2018.

Source: Kingsmen Creatives

When I plotted the gross and net margins for the group, a clear trend can be seen – that of declining net margins. Kingsmen has traditionally been able to command a net profit margin of between 5% to 7% during its heydays but has seen net margin collapse to a low of 2.3% in FY 2018.

Source: Kingsmen Creatives

The key reason for this was due to the high-end, luxury brands changing their strategy of rapid expansion, as they chose large, flagship stores instead of opening multiple stores in different locations within Asia. As a result, Kingsmen’s Interiors division had to shift its attention to the mid-market, affordable luxury segment where there was competition from many smaller contractors. The group was undercut on pricing and as a result, suffered from significantly poorer gross and net margins.

As Retail and Corporate Interiors division takes up nearly 46% of total revenue, this has had an adverse impact on the company’s profitability.

Source: Kingsmen Creatives

Cityneon’s CEO Ron Tan has described the events and exhibition business’ Big Three as “Phua Chu Kang (PCK)”, representing Pico Far East Holdings Limited, Cityneon and Kingsmen Creatives. This is a reference to the comic local contractor character played by actor Gurmit Singh that ran for a few seasons on local TV. Kingsmen, being a ‘mere contractor’, will find it tough to earn superior margins amid a crop of smaller local contractors vying for business and undercutting the group in the mid-market, fast fashion brands space.

Entry into the IP business: an evolution, not a revolution

The example of Cityneon evolving its business into an IP-driven one has been well-documented, as it started out by taking on the Avengers S.T.A.T.I.O.N. Intellectual Property (IP) and building a permanent set in Las Vegas. Subsequently, the group constructed travelling sets that were toured in major cities around the world. The model was effective in drawing crowds due to the strong branding associated with the attractions, and Cityneon could collect various fees from each operator in turn.

Kingsmen is now trying its hand at IP ownership by acquiring the NERF AX IP from Hasbro back in February 2018. The deal was sealed back then to construct an FEC in Singapore to start off with. With the success of the first FEC, more such NERF AX will be constructed in both China and the USA, with Kingsmen sub-licensing the rights and earning a fee. In time to come, Kingsmen’s CEO Andrew Cheng has mentioned that the group plans to have its own IP, though he gave scant details of what it would involve.

Investors should view this more as an evolution for the group rather than a revolution. First off, Kingsmen managed to successfully evolve its business to include theme parks (USS) back in 2009. At the time, many naysayers were also warning of the risks and wondering whether the group could pull it off. After five years of building up their competence and managing a team that specialises in theme park projects, the critics have been silenced. Now, in 2019, Kingsmen is undergoing its next phase of evolution to become an IP owner, and this can be viewed as an extension of its capabilities in design and conceptualisation.

Asset-light, recurring revenue model

Kingsmen core business of events, exhibitions and interior fit-outs has a key weakness – they are all order-book driven and the group needs to continually pitch for new jobs in order to fill up its order book. This entails significant investments in staff, resources, time and working capital.

The new NERF AX model is envisioned to be both asset-light (as future FECs will be de-risked by partnering with locals who will take up the bulk of the capital expenditure) and can allow Kingsmen to collect steady, recurring income in the form of sub-licensing fees and ticket sales. Different revenue streams will boost the profit and loss statement at the associate line (rather than top-line) but should improve overall profitability as the net margins are anticipated to be much higher than the current core business.

An uplift in profit in the works?

If this model works out well, there may be a potential uplift in profits for the group. However, a long gestation period is required for the NERF AX IP (as it expands into countries such as China and the USA). Investors will need to exercise patience, fortitude and tenacity to hold on to the shares as the short-term earnings may look very ugly (due to depreciation, marketing and promotion expenses hitting the bottom-line). I expect contributions to only flow through meaningfully from FY 2021 onwards as the China and USA NERF AX should only be ready by end-2020.

Kingsmen is not standing still though, as it continues to secure more IP along the way. Aside from NERF AX, Kingsmen has also announced an IP with Discovery Inc to develop Animal Planet travelling shows. The first such travelling exhibit (called ‘Living Worlds‘) will open at the Singapore Science Centre on November 16. The group’s third IP, also with Hasbro, was secured in June 2019 and involves the launch of edutainment-inspired FEC across Asia-Pacific incorporating a suite of Hasbro brands including Play-Doh and Lite-Brite, among others.

Risks relating to the IP strategy

As with any new strategic initiative, there are risks involved and I have stated a few of these for investors’ consideration.

  • The dividend (currently at 2.5 cents/year) may get cut if new IP initiatives suck up more capital or need more upfront payments to secure new IP
  • Development of Kingsmen’s own IP may also suck up time, manpower, resources and funds
  • If the NERF AX concept fails, the group will need to take an impairment charge, resulting in a big hit to P&L. As this is a nascent concept for live play, there is a chance the idea may not work out and scuttle Kingsmen’s plans to bring it to China and other countries.

The fifth perspective

Kingsmen has been hit by headwinds in the retail industry and has seen its net profit decline drastically over the last 3 years. However, the group has embarked on a new strategic direction by acquiring three IP, with the intention of moving into the areas of live play and edutainment. It is still early days for the group, but if these initiatives pan out, it could mean a new, steady recurring source of revenue for the group and a significant uplift in profits. Investors should keep faith with the group as they have shown time and again that they can adapt to changing industry conditions and extend their capabilities into new areas.

Royston Yang

Royston Yang is a long-time value investor and spent six years as a investment analyst. He believes in a long-term 'buy and monitor' strategy, and places a strong emphasis on fundamental analysis and identifying catalysts that can unlock the value of a business. He graduated with a Bachelor of Accountancy from Nanyang Technological University and an MBA from National University of Singapore. In his free time, Royston enjoys cycling and playing squash.

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