Pico Far East

All figures in HKD

2015 Sales                                                    4.2B    2020 Sales                                                             4.4B

2015 Operating Profit                                  332M    2020 Operating Profit                                            158M

2015 Cash from Ops – CapEx 393 - 20.8 = 372M   2020 Cash from Ops – CapEx  approx. 347 - 38 = 309M

2015 Tangible Book Value                            1.6B    2020 Tangible Book Value                                     1.24B

 

Market Capitalization                                     1.65B

Short Debt                                                       0.2M

Long Debt                                                    611.9M

Total Debt                                                       612M

Cash                                                               1.24B

Enterprise Value                                             1.34B  

 

Current Assets                                                  2.7B

Current Liabilities                                             1.8B

2020 Working Capital                                      900M

2015 Working Capital                                      700M

 

Capital Employed          =      Fixed Assets/PPE + Working Capital + Pension

                1.72B             =     940M + 700M + 81M

ROIC    300M/1.72B     =     10-17%

 

Tangible Book Value CAGR 5 yrs    =      1.7%

Net Quick =                                               1.5x

 

2015 DSO =  88           2020 DSO = 104

2015 DIO =  6.3             2020 DIO = 6.2

2015 DPO = 56            2020 DPO =  52

2015 avg. Cash Conver. Cycle        39 days

2020 avg. Cash Conver. Cycle        58 days 

 

Pico Far East’s (SEHK: 00752) main business is in exhibition planning and event promotion for international brands, with 50-60% of its business coming from China. Pico is engaged in event marketing services, planning and construction of museums, themed environments, signage for brands, and organization for shows.

More than 1/10^th of business in China comes from prominent Chinese automobile brands— electric cars, DongFeng, Mercedes Benz, and big conglomerates such as Google and Alibaba, all use Pico Far East— as they have competence in setting up large booths and exhibitions promptly over-night. Their technical laborers or contractors also have an expertise in high quality set ups. Pico also supplies aluminum frames which are snap on for quick builds. Pico currently has over 2400 full time employees which incur a staff cost of HKD 437M (USD56M). To facilitate expo construction and aluminum frames, Pico also has a 27,000m² factory in Dongguan, China.

Exhibitions and event planning is an inherently cyclical business which depends on conglomerates having a marketing budget— growth largely follows GDP. In terms of competition, there are 8-12 companies that are at the scale and can provide the same quality that Pico can.

Pico, at an enterprise value to EBIT multiple of 10x, and a 5 year average return on capital of 8.6% with a manageable debt to equity of 42% is fairly priced. Pico for its stable balance sheet and relatively cheap price for almost non-existent to single digit revenue growth is an attractive investment prospect in a difficult industry.

Competitive advantage is always regional. GL events dominates France and parts of Europe, in Singapore: Cityneon Holdings), in the United Kingdom, ITE Group, Ascentia, and UBM, in the US, EEX. There are also companies such as Informa, RELX, Kingsmen, etc. In terms of competitors in the expo space, there are well over 30 companies. Besides relationships with contractors and clients, and a superior management team, there isn’t much Pico can do to differentiate itself to gain a competitive advantage. Pico has a local monopoly in China and parts of Asia, and is trying to expand to Europe and USA via acquisitions.

Pico Far East has made 5 acquisitions since 2017 to gain market share in the U.S. as it only comprises 5-8% of current business. These 5 acquisitions have brought in 40 new clients, but one acquisition “Not Ordinary Media LLC”, did not meet expectations, and the two original sellers were asked to step aside and asked to revised and lower the considered amount. Most of the gains from Local Projects LLC, a marketing agency, and Infinity Marketing Team, LLC was offset by the impairment loss on the goodwill of NOM LLC.

In December 2017, MTM completed a second acquisition, Seed Communications LLC Sub Rosa. Sub Rosa is an independent brand strategy and design company known for its market-leading approach to Empathic Design. Sub Rosa intended to expand their service capabilities to specialize in cultural intelligence and social listening. The most recent acquisition was an additional purchase of Infinity Marketing in June 2020, to make Pico a 60% shareholder.

Whether these acquisitions truly brought shareholder value and captured new market share is up to speculation as management slow to reveal the results.

My assumption is that most were overpaid and brought little to no value in terms of moving the needle. In hindsight, acquisitions made were pre-mature, as Covid offered cheaper deals.  

Pico lowered its dividend payout ratio from 80% in 2017 to 65% in 2019 as it plans to reserve more cash for future acquisitions to expand in the US market and for working capital needs. Supported by strong free cash flows and as of April 2020, Pico had 1.2B in Cash with 500M of the cash parked in mainland China. The quick ratio is at 1.5x and debt to equity has risen to 40% for contingency needs due to COVID, whereas it zero in 2015. In the future, when business returns to normal, Pico has the capability to resume its normal 80% dividend payout.

Pico has secured some pavilion and overlay projects for the Expo 2020 Dubai and Tokyo 2020 Olympics with contract values of HK$503m and HK$254m respectively. Securing larger projects or events will be positive to Pico’s share price.

Many events were postponed to Q3 or Q4 of 2020 (Auto China in Beijing, China Int Import Expo) or to 2021 (Art Expo and Gem Expo in Hong Kong, and Vinexpo in Shanghai, Tokyo ParaOlympic Games, etc) and 2022 due to COVID-19 (Rainforest Lumina at Singapore Zoo).

Profit from core operations HKD84M (USD10M) as of six months ended for April 30, 2020, where as in 2019, it was HKD 192M (24M).

Management eats their own cooking with James and CEO Lawrence Chia and family having 37.33% of Pico Far East through the holding company Pine Asset Management.

 

Growth, risks, and future prospects in China for Expos

In China, the convention and exhibition services industry is expected to generate 5.6 billion in revenue in 2020 from an estimated 5,910 conventions, which decreased by 10.6% from 2019. Industry revenue is expected to rise at an annualized 3.4% over the five years through 2020. This is in line with Asia’s annual GDP growth rate at 4-6% -- demand for convention and exhibition services stems from a growing Chinese economy and increasing international trade.

Even after COVID-19, when things return to normal, net profits won’t grow more than 7-8%, as net profits were HKD 257M in 2014 and HKD 320M representing a compounded annual growth rate of around 3-5%.

Pico is a business with significant market share in China and Asia with honest and capable management, but the nature of the business and the amount of competition will slowly erode profits. Due to the nature of tendering and bidding, Pico cannot charge prices which are much higher than competitors, hence the relatively low operating margins of margin of 4-9%.

Revenue has more than tripled in the last decade for Pico with the growth rate being most spectacular in the last 3 years. However, tangible book value hasn’t grown proportionally, and has shrunk slightly in the last 3 years.

 

Liquidity and Solvency

Pico tries to collect a 50% deposit at least 3 months before commencement of the project and tries to pay suppliers 6 months later.

Despite these policies, from 2011-2013, the cash conversion cycle was notably shorter at 23-35 days, where as in 2017-2020, the cash conversion cycle was at least 60-65days.

 Accounts payable didn’t fluctuate much over a decade at 55-60 days. Inventory outstanding also remained at 5-7 days.  It was accounts receivables and sales outstanding that went up from 75 days in 2010-2013 to over 100-110 days. This delay in payment by customers affect cash flow and a minimum amount of cash and working capital is required for operations and for contingency needs.

Total debt to equity was 41%. Long term debt was employed and was 31% to equity and 22% to total capital specifically for opportunities for acquisitions abroad to enter foreign markets.

Pico has been consolidating their project management, procurement and production processes into a centralized deployment model which is called Pico X. In 2018, through this deployment center, there will be tighter measures on cost validation, procurement, and the vendor network.  Management claims data collected will bring cost efficiencies to help the bottom line.

Despite most of Pico’s revenue being generated from China, most of the backlog will be from Japan and the Middle East. The Oman project, designed by Cox architects, is 38,600m² has a contract sum of 775M. Another huge project in the Middle East is the 2020 Dubai Expo, which is worth 509M.

A new 10,000m² factory was built in Dubai in 2017-2018 for the 2020 Expo in Dubai which has been pushed back.

For Tokyo Olympics, Pico was awarded the project in Yumenoshima Park, which is an archery field worth 263M. The 140M Hollywood theme park is actually for Universal Studio’s theme park in Beijing.

These large events set the foundation for Pico’s recovery as 2019’s results were below expectations due to higher acquisition related costs. Pico anticipates having a project pipeline with a total contract value of hkd 1.3B in 2021. Both Tokyo Olympics and the World Expo will be delayed until Q4 of 2021.

 

Digital solutions and virtual events

Pico has accelerated marketing their digital strategies and solutions which they started 4 years ago, turning it into an important revenue generator. Digital solutions include interactive experiences, data analytics, event technology, social media and augmented / VR solutions.

Some examples include transforming Huawei's regular developer conference into a virtual event, delivering broadcast for a 2-day event which attracted over 10m views. There was also a virtual launch for Chinese Maple's first car model, DBS Asian Insights conference in Singapore, Alibaba's virtual conference, China Mobile Global Virtual, Panasonic virtual product launch, and Schneider Electric virtual conferences, etc.

Being conservative, I don’t think social media advertising or going digital will improve operating margins or bring in new growth. That space in China is too entrenched.

 

 Valuation, Risks/The worst case scenario:

Pico has been adopting cost-saving measures. If you examine Pico’s cost structure, variable costs account for more than 70%. Gross margins are at 30-32% and SG&A is 23-28%, which eats in to operating margins.

Gross margins will always remain near 30%, and SG&A can be dampened—

Distribution costs accounts for hkd660M or 13% which can be cut by 30-50%. Pico has already implemented a no pay leave policy for staff in Asia.

Administrative costs accounts for 12% or hkd612M which can be reduced by optimistically, this will take half a year. Rent expense is minimal as Pico owns most of their offices in China

Maintenance capex will always be within the 15-35m range. With hkd 600-700M in net cash, Pico could survive one to two years without sales. Dividends were stopped for 2020 as the company is prioritizing survival over capital return but should resume once operations stabilize

With minimal debt at 800-850M, at an enterprise value of hkd1.4B, my conservative assumption is that Pico Far East is worth 2.8-3B, and not anymore until there is additional growth in book value and a cutback in SG&A to improve operating margins. Management has not been the best with aquisitions and have not proven themselves as prudent capital allocators. 

  

Catalyst

Recovery in Expo industry especially in Asia

Increase the scale of digital conferences and digital marketing

Increase their presence in Europe and USA through acquisitions

Reinstatement of dividends

Cutback in SG&A to improve operating margins