Pico Far East 0752
August 13, 2020 - 7:50am EST by
zyos
2020 2021
Price: 1.04 EPS 0.02 0.15
Shares Out. (in M): 1,238 P/E 46.8 7.1
Market Cap (in $M): 1,288 P/FCF -12 6
Net Debt (in $M): -605 EBIT 65 187
TEV ($): 683 TEV/EBIT 10.8 3.8

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Description

Pico (0752 HK) is a small-cap listed in Hong Kong that mainly does exhibition and event services (think the people who designs an exhibition, sets up booths, conceptualises the design etc). Obviously covid has totally wrecked their business, I believe that if the industry survives (this is a big if), Pico will be in a more advantageous position as many of its less-capitalised /  less-technology savvy peers would've gone bust.

Investment Summary

  • Established in 1969, Pico Far East is one of the global leading players in the exhibition and event marketing services; visual branding experiences; museum, themed environment; conference and show management. With over 50 years of experience, the company has demonstrated its resiliency to survive multiple economic downturns and reinvent itself to stay relevant throughout the years. 
  • The company has 40+ offices across 37 cities, organized over 800 tradeshows and received over 20 international awards as the company transitions away from being a traditional event marketing service provider into Total Brand Activation (TBA) company. From strategy to execution, Pico aim to bring brands to life and create experiences to ensure that every exhibition, event, conference, interior and themed environment delivers a lasting brand experience on their audience 
  • The incremental return on capital for their key segment, Exhibition & Event Services (78% of sales and 73% of total EBITDA) which company guides will grow top-line around 10% each year over the next 3 years is expected to be over 70% as the maintenance capex is around HK$30mm each year. In the current context, the valuations of 2x 2019 EBIT, 10-15% FCFy and a potential 10% dividend yield is attractive, and the business has visibility due to some large events in 2021 (Olympics, Dubai World Expo, Oman Museum)
  • With net cash balance of HK$763m (20% of market cap) the balance sheet is strong, and David Webb’s presence ensures that Pico will have good corporate governance/capital allocation
  • Pico is cheap because: i) Thin liquidity (~US$150k per day owing to the presence of many long-term shareholders who view the stock as a stable div play), ii) Lack of broker coverage (only 1 analyst), and iii) not a clear comp as few pure play listed players + the company is seen as in a cyclical industry although Pico has a clear track record of growing both sales and earnings over 5-year periods

What does Pico Far East do? 

  • Pico's primary business is providing exhibition and event marketing services, and its also engaged in the business of museums, themed environments, brand signage and visual communication; conference and show management. Geographical region sales splits for FY19:
    • Greater China (includes HK, Taiwan and Macau): 53% 
    • 1India, Malaysia, Singapore, Philippines and Vietnam: 2%
    • Bahrain, Qatar, and UAE: 13%
    • UK and the US: 9%
    • Others: 4%
  • On the backend, Pico's initiative launched in 2016 (named Pico+) to use technology to blend wearables, digital, social media and other tech-based modes of engagement with real-life experiences that will allow Pico to cross sell additional services which have higher margin and provide even more differentiation from competitors
  • Customers of Pico include some of the largest automobile players (Chevrolet, Cadillac, Jaguar Land Rover, Lexus, Mercedes-Benz, Toyota, Volvo and many of the Chinese car companies) and tech companies (Huawei, Google, Tencent, Alibaba, JD.com, HTC)
    • Client base is very diversified with top 5 clients always changing year to year but they are most dependent on the automotive sector (~10% of total sales)

 

How does Pico Far East operate?

  • Despite its leadership position, Pico doesn't rest on its laurels and still continues to seek improvement. In 2018, Pico took a huge progressive and industry-leading step (called Pico X) by consolidating their project management, procurement and production processes into a centralized deployment model. Through this deployment center, there will be cost benefits to the group by overseeing and managing cost validation, procurement, the vendor network and in-house production throughout a project's work flow. Over time, this system should accumulate data, allowing it to create a useful tool to service clients in a smarter and more cost efficient manner 
  • With ~100,000 square metres of production facilities across China, Southeast Asia and Middle East that is supplemented by many specialist subcontractors, Pico is able to provide unparalleled production and delivery services for their customers
  • Given their size compared to regional peers, Pico probably enjoys some degree of economies of scale 
  • For venues that are very far from their facilities (eg overseas), Pico will either ship completed goods or outsource them to local sub-contractors in the region depending on time frame, quality required and client's budget (higher budget and quality = ship from Pico's production facility)

 

Why do customers go to Pico instead of their competitors? What are the barriers to entry?

 

  • Reputation/brand and scale are the main barriers to entry for Pico - For example, if you're a Google or Alibaba, you would prioritize quality and speed over cost as a poorly executed exhibition could have negative impact on their image
  • In most cases, the venue owner will only give the organizer 1 day to prepare and set up the exhibition to maximize the usage / rental yield from their property
  • Therefore timing and quality is of the utmost importance to the organizer and exhibitors - for example the exhibitor is unable to set up their booth for half a day, it would have 2 consequences: i) very bad for their image and ii) high opportunity cost as most exhibitions last for 1 to 3 days only
  • Because of their long working relationships with subcontractors, their 100k sqm of production facilities and experience + know-how, Pico has a very good track record of delivering on their promises compared to their competitors 
  • As one of the biggest exhibition service providers, they enjoy economies of scale - for example, they have a lot of operating supplies made of aluminium (management described it to be akin to Lego) that can be easily dismantled and sent back to their warehouse to be recycled, saving them costs on raw materials as higher demand = lower marginal cost

Risks:

 

  • Although there are few large international players like Pico, competition is fierce as they will always have competing bids for every project from small local players. Therefore, because of their size and reputation, Pico dedicates more attention to the high-end large scale exhibitions and work with big clients who will appreciate reputation, design, quality and execution more than purely price. 
  • Nonetheless, Pico cannot charge too much more than competitors, hence the relatively low EBIT margin of 6-8% despite being the market leader 
  • For most exhibitions, the organizer will have an open tender and invite service providers to bid (price + design). In a sense, this industry is very similar to architects but less fragmented because of multi-city projects. So there might be 40-60 service providers in each region but only 5-10% have the capacity to handle large projects

Management plans: Organic and M&A

 

  • Their strategy of Total Brand Activation (TBA) launched in 2011 has been successful in differentiating the group's services. A greater number of companies are looking for more precise and targeted marketing solutions through a mixture of online and offline media to reach their audience 
  • The unique thing about Pico Far East seems to be the more projects they get, the more data they collect on the needs and wants of their customers - allowing them to spot upcoming trends with the data they get to stay one step ahead in the industry. 
  • Furthermore, Pico will continue to pursue opportunities to launch more events where the IP is owned by Pico, allowing them to grow and commercialize them to generate future income
  • Dividends are stopped for 2020 as the company is prioritising survival over capital return but I expect HK$0.10 or above once operations stabilise 
  • Thus far their M&A has been quite disasterous given that they acquired 5 companies from 2017-2019 in the US and with covid, I expect huge write downs in the next few quarters. According to management:
  • In hindsight, he admitted that he agreed with the statement that their acquisitions were done at the peak, and have stopped all M&A activities even those that were almost closed since covid 
  • Nevertheless, they are still sticking to the strategy that they do not buy companies for financial investments, but to transform the target through their experience + network, and get technologies 
  • Have to be honest that acquisitions haven't produced significant earnings, but they are not looking for 1-3 years results, but much longer term, so too early to conclude if Alexi (person in charge of M&A) is not good
  • On the topic of industry consolidation, they are just focusing on themselves at the moment and think the full impact of the virus will be seen in 1-2 months. Said many of their competitors are suffering much more because they are not geographically diversified and do not have digital solutions
Digital solutions - Adapting to covid
Pico has accelerated marketing their digital strategies and solutions which they started 4 years ago, turning it into an important revenue generator and competitive edge. Digital solutions include interactive experiences, data analytics, event technology, social media and augmented / VR solutions. 
 
Some examples of virtual events:
  • Transformed Huawei's regular Developer Conference into a virtual event, delivered broadcast for a 2-day event which attracted over 10m views
  • Virtual launch for Chinese Maple's first car model. Their scope of work ranged from concept development and production of virtual elements including augmented reality, to broadcast across various online media platforms
  • Upcoming in H2 2020 DBS Asian Insights conference in Singapore, Alibaba's virtual conference, China Mobile Global Virtual, Panasonic virtual product launch, and Schneider Electric virtual conferences in China
Management has high insider ownership
  • Lawrence Chia (Chairman & CEO): Has over 30 years of experience in the events industry and Chairman of the group since 1994. Through the family investment vehicle, Pine Asset Management, the CEO and his family owns 37.4% of the company
  • James Chia (President): Older brother of the CEO and has been in the industry for over 40 years and has overall responsibility of business in South Asia
  • Chia Song Lim (Honorary Chairman): Worked in the industry for over 45 years and was the founder of Pico Group. He is the elder brother of Lawrence and James. Currently he overseas the exhibition hall management business 
  • Together, the family owns 37% of the company
  • Other significant investors: i) Fidelity (10% of CSO) is the second largest shareholder behind the founder's family, ii) Mawer Investment (2.5% of CSO) a value-oriented fund with strong historical performance

The worst case assumptions would be:

  • For H1, assuming a continuation of no exhibitions and events, China revenue will decline 50% yoy, buffered by other things like digital events and showroom plus fiscal year ends in October so they have Nov and Dec of 2019 included 
  • For H2, China revenue decline of 70% if we assume all exhibitions will be stopped - argument is that this is unlikely to happen because China is recovering and government is trying to restart work
  • Fixed vs variable costs - 70% of costs are variable (GPM is always ~30%) and out of the remaining 26% which is fixed but can be scaled down:
    • Distribution costs accounts for 13% (HK$659m) - can reduce this by up to 50%, already implemented no pay leave in China, HK and Singapore for project staff
    • Administrative expenses accounts for 12% (HK$612m) - can reduce this by 40-50% but will need a lag time of 1 quarter. Rent expense is minimal as they own most of their offices in China
  • Maintenance capex will be 20-30m
  • With HK$605m in net cash, Pico could survive 2-3 years with zero sales, but that would be a too draconian forecast for a company with many blue chip names in China 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  1. Recovery in MICE industry
  2. Demonstrate ability to monetise digital conferences / events 
  3. Payout in government subsidies 
  4. Reinstatement of dividends
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