Asian Idea Generator Weekly: CEO Buys Shares Of Leading Exhibition Services Provider, Peter Cundill Screen, And A Play On Japanese Gaming

by: The Value Pendulum

CEO buys shares of Asia's largest exhibition services provider in the open market for the first time.

I come up with a list of quantitative screening criteria to emulate what Peter Cundill could have invested in Asia, based on his biography.

The opening up of the Japan gaming market is a call option for this Singapore-listed casino operator.


This week of the Asian Idea Generator Weekly continues to generate ideas by profiling Asian-listed companies in the following categories: 1) stocks which either see insider buying or significant ownership by institutional investors; 2) stocks that are filtered from quantitative screens; and 3) stocks that act as proxies for secular investment themes.

Piggybacking: Asian Insider Trades

Pico Far East Holdings (OTC:PCOFF) [752:HK], Asia's largest exhibition services provider listed in Hong Kong, saw its Chairman and CEO Mr. Lawrence Song Huat Chia buy the company's shares on the open market last week. Mr. Lawrence Song purchased 184,000 shares and 28,000 shares on June 20, 2019, and June 21, 2019, at average share prices of HK$2.319 and HK$2.289 respectively. As a result, Mr. Lawrence Song's shareholdings interest in the Pico Far East increased from 0.85% to 0.87%.

While the aggregate consideration of the shares Mr. Lawrence Song bought, equivalent to HK$491,000 or $63,000, does not seem to be particularly large, this is still significant for a couple of reasons.

Firstly, this is the first time Mr. Lawrence Song has bought the company's shares directly on the open market since the company was listed. He has previously accumulated his shareholdings in the company via the exercise of employee stock options. Mr. Lawrence Song is a long-tenured employee of the company, having started working at Pico Far East in 1984 and been the company's chairman since 1994.

Secondly, the relatively smaller amount of shares bought by Mr. Lawrence Song is partly a function of the stock's liquidity, rather than solely attributed to his lack of willingness to purchase more shares. Pico Far East average daily trading volume for the past 3 months is around 700,000 shares. The 184,000 Pico Far East shares he purchased on June 20, 2019, represent approximately a quarter of the average daily trading volume. Moreover, Mr. Lawrence Song and other company insiders could potentially buy more shares in the future.

Thirdly, Pico Far East's valuation might have been the most important trigger for Mr. Lawrence Song's share purchase. Pico Far East's share price has declined by approximately 35% from its all-time share price peak of HK$3.42 on May 27, 2018, to a 2-year share price low of HK$2.24 as of June 19, 2019. Pico Far East is trading at 10.6 times FY2018 (YE October) historical P/E and 10.1 times consensus FY2019F forward P/E (note there is only a single sell-side broker covering the stock), based on its share price of HK$2.46 as of June 26, 2019. Net cash as of April 30, 2019 (1HFY2019), amounting to HK$660 million or HK$0.53 per share, accounted for 22% of its market capitalization. Adjusted for the company's net cash balance, Pico Far East is trading at 8.7 times FY2018 historical ex-net cash P/E and 8.3 times consensus FY2019F forward ex-net cash P/E. The stock also offers a trailing dividend yield of 5.5%.

Started in 1969 and listed in 1992, Pico Far East is a Hong Kong-listed exhibition services company. The company is a market leader in the Asian exhibition services market and it provided an estimate of its market share in Hong Kong, China, and Singapore at 60% in 2010. With the company's top line increased by approximately 50% between FY2010 and FY2018, it is very likely that Pico Far East has maintained its market leadership.

The company generated 83.2%, 8.3%, 5.9%, and 2.6% of its 1HFY2019 revenue from the Exhibition and Event Marketing Services business (provision of design, decoration, and stand fitting services for exhibitions and events), the Museum, Themed Environment, Interior & Retail business (the design and decoration of fixtures for the museum, themed environment, interior and retail industries), the Visual Branding Experiences business (the production of corporate signage), and Conference & Show Management business (the organization of conferences and shows) respectively. With respect to geographic markets, Greater China, South & Southeast Asia, the Middle East, U.K. & U.S. markets, and Other Markets accounted for 59.7%, 19.4%, 9.2%, 8.6%, and 3.1% of Pico Far East's 1HFY2019 sales respectively.

Pico Far East's share price decline over the past one year is likely attributed to slowing global economic growth and rising U.S.-China trade tensions. The continued growth of its core Exhibition and Event Marketing Services business, accounting for over 80% of sales, is heavily dependent on the demand for exhibitions and events, which is, in turn, linked to economic growth. Furthermore, Greater China is Pico Far East's largest market contributing close to 60% of its FY2019 sales.

It is impossible to predict the direction of the economy and the outcome of U.S.-China trade talks, and the likelihood of exhibitions and events being deferred or even cancelled. If the market is right (the sell-down in the company's share price) and economic growth further weakens, the stock could get even cheaper in the near term. But if one is willing to look beyond the short-term uncertainty, there are quite a few things to like about Pico Far East as a potential investment candidate.

One factor is that Pico Far East's clients could shift their attention to China's domestic market, which could be a beneficiary of the Chinese government's stimulus measures to boost consumption. This could help to partially offset the overall decline in business volumes resulting from a slowdown in the global economy. Also, Pico Far East still has a pipeline of projects to be delivered, particularly in China, which could underpin future revenue. These Chinese projects include a long-term contract with Lexus in China deliver multiple events and exhibitions; works for theme parks in Chongqing, Kunming, and Wuxi; and new contracts secured for the water- and snow-themed zones in the Chongqing park. Other significant projects outside of China include a large-scale museum project in Oman targeted to open in 2020; an overlay contract ( venue technical design and construction) for the Archery venue at the Tokyo 2020 Olympic and Paralympic Games; design and build contracts for the Algeria Pavilion and the Pakistan Pavilion for Expo 2020 Dubai.

Another factor is Pico Far East's utilization of the cash pile on its balance sheet. As mentioned above, Pico Far East has net cash of HK$660 million (or gross cash without deducting debt of HK$1.15 billion) on its books as of April 30, 2019, which could be used for further value-accretive acquisitions. On June 24, 2019, Pico Far East announced that it had acquired a 60% stake in a U.S. marketing, event, and promotion agency called Infinity Marketing Team, LLC for $18.7 million (including earn-outs). Infinity Marketing Team will be the fourth U.S. acquisition that Pico Far East has done in the past three years since 2017. The results are starting to show, with the company's U.K. & U.S. markets segment revenue increasing by 78% YoY for 1HFY2019. Pico Far East could use its cash to buy more companies on the cheap in the current weak market environment.

The long-term growth prospects for the exhibition services market are likely to remain unchanged. Allied Market Research forecasts the global Meetings, Incentives, Conferences, and Exhibitions (MICE) market to grow at a 7.6% CAGR between 2018 and 2025 to reach $1,439.3 billion in 2025. As the market leader in exhibition services in Asia/China with a growing presence in the U.S., Pico Far East is an attractive proxy for the long-term MICE market growth.

The key risk for Pico Far East is a further weakening in the global economy leading to lower demand for new exhibitions and events, and deferral or cancellation of current exhibitions and event in the pipeline.

Screens: Peter Cundill

Peter Cundill is one of the most successful money managers and value investors in history. The Cundill Value Fund that he managed delivered a 35-year CAGR of 13.2%, based on data provided by The Peter Cundill Foundation. In the Peter Cundill biography "There's Always Something to Do: The Peter Cundill Investment Approach" authored by Mr. Christopher Risso-Gill, Peter Cundill's investment criteria for the Cundill Value Fund was disclosed as follows:

  • The share price must be less than book value. Preferably it will be less than net working capital less long-term debt.
  • The price must be less than one half of the former high and preferably at or near its all-time low.
  • The price earnings multiple must be less than ten or the inverse of the long-term corporate bond rate, whichever is less.
  • The company must be profitable. Preferably, it will have increased its earnings for the past five years and there will have been no deficits over that period.
  • The company must be paying dividends. Preferably, the dividend will have been increasing and have been paid for some time.
  • Long-term debt and bank debt (including off-balance sheet financing) must be judiciously employed. There must be room to expand the debt position if required.

Relying on Peter Cundill's investment criteria for the Cundill Value Fund above, I use the following criteria to screen for Asian stocks that Peter Cundill would have been interested to invest in:

  1. Price-to-book ratio under 1.
  2. Current share price is at least 50% below its 5-year historical share price peak.
  3. Trailing twelve months P/E less than 10.
  4. Profitable in every year for the past 10 years.
  5. Increased dividend for at least five consecutive years.
  6. Debt-to-equity ratio below 1.

The Asian companies that passed the screen above are ranked in descending order of P/B ratio as follows:

Stock P/B Ratio Percentage Below 5-Year High Trailing P/E Debt-to-Equity
The Chiba Bank Ltd (OTC:CHBAF) (CHBAY) [8331:JP] 0.43 50.3% 8.5 0.66
Kingboard Holdings Ltd (OTC:KBDCF) (OTCPK:KBDCY) [148:HK] 0.49 56.5% 4.64 0.58
Kasai Kogyo Co Ltd [7256:JP] 0.49 62.0% 6.65 0.56
Hopefluent Group Holdings Ltd (OTC:HPPEF)[733:HK] 0.52 50.0% 4.7 0.24
Nihon Kagaku Sangyo Co Ltd [4094:JP] 0.59 58.0% 8.33 0.02
Tongda Group Holdings Ltd (OTC:TDGFF)[698:HK] 0.64 80.4% 6.67 0.7
Sinopec Kantons Holdings Ltd (OTC:SNPKF) (OTCPK:SPKOY) [934:HK] 0.69 56.5% 6.31 0.32
Furukawa Battery Co Ltd [6937:JP] 0.88 61.0% 8.91 0.48
Shibaura Electronics Co Ltd [6957:JP] 0.94 59.0% 9.45 0.07

Peter Cundill's investment criteria make intuitive sense. Valuation is assessed using P/B, P/E, and with reference to historical share price. Quality is evaluated based on the company's historical profitability and dividend payment track record. Downside risk in terms of credit profile is determined by the company's debt-to-equity ratio. Undervalued, high-quality, low credit risk stocks are what Peter Cundill looks for.

Thematics: Japan Gaming Market Opening Up

Singapore-listed Genting Singapore Ltd. (OTCPK:GIGNF) (OTCPK:GIGNY) [GENS:SP] is the owner and operator of Resorts World Sentosa or RWS, one of only two integrated resorts in Singapore. The Singapore gaming industry is a duopoly with Genting Singapore and Las Vegas Sands (LVS) operating the other integrated resort, Marina Bay Sands. The Resorts World Sentosa casino started its phased opening since February 14, 2010.

Genting Singapore is trading at a trailing 12 months EV/EBITDA (the most common valuation metric for casino operators) of 6.5 times, 14.9 times trailing 12 months P/E, and 15.6 times consensus forward FY2019 P/E, based on its share price of S$0.92 on June 25, 2019. Net cash of approximately S$3.3 billion as of March 31, 2019, accounted for approximately 30% of its market capitalization. In contrast, Genting Singapore's Macau gaming peers, including Galaxy Entertainment (OTCPK:GXYEF) (OTCPK:GXYEY) (OTCPK:GXYYY) [27:HK], MGM China Holdings (OTCPK:MCHVF) (OTCPK:MCHVY) [2282:HK], Sands China (OTCPK:SCHYY)(OTCPK:SCHYF)[1928:HK], SJM Holdings (OTCPK:SJMHF) (OTCPK:SJMHY) [880:HK], and Wynn Macau (OTCPK:WYNMF) (OTCPK:WYNMY) [1128: HK] are valued by the market at 11-18 times trailing EV/EBITDA and 15-20 times consensus forward P/E.

Genting Singapore hit a 6-year share price high of S$1.38 on January 21, 2018, before seeing its share price drop to a low of S$0.86 on October 30, 2018. The company's share price subsequently recovered to reach S$1.11 on February 8, 2019, before declining to the low of S$0.86 on June 4, 2019, again. I will explain the factors contributing to Genting Singapore hitting the share price low of S$0.86 in October 2018 and June 2019 respectively.

The company's share price first fell from its January 2018 peak of S$1.38 to a low of S$0.86 on October 30, 2018, due to rising U.S.-China trade tensions since March 22, 2018, when Trump first considered imposing tariffs on Chinese products. There were concerns that an economic slowdown in China could negatively impact Genting Singapore's VIP segment Gross Gaming Revenue or GGR. The market's concerns were not unfounded as Genting Singapore saw 1Q19 revenue and adjusted EBITDA down -5% and -8% YoY to S$640.4 million and S$329.7 million respectively, which was largely attributable to a 19% decline in VIP volume for the quarter. The company does not disclose the breakdown of volumes and revenues for the VIP and mass market gaming segments.

Genting Singapore's share price started its climb back to S$1.11 in February 2019, as U.S.-China trade tensions appeared to ease temporarily. The company's share price continued its descent again, with the announcement of plans to expand its RWS integrated resort in April 2019 and the escalation of U.S.-China trade tensions in May 2019 again.

Prior to the official announcement regarding Genting Singapore's expansion plans for the RWS integrated resort in April 2019, the market expected Genting Singapore's RWS to benefit from the capacity expansion (an additional 50% r 164,000 square meters of new gross floor area of leisure and entertainment space) which should lead to increased visitations in time to come and the positioning of RWS in Sentosa as a key tourist attraction. However, RWS's expansion plans were announced together with other changes to the Singapore gaming market which were not as positive. Casino entry levies for Singaporeans and Permanent Residents were increased by 50%, from S$100 to S$150 for the daily levy, and from S$2,000 to S$3,000 for the annual levy. The increase in casino entry levies for Singaporeans and Permanent Residents are expected to hurt Genting Singapore's mass market segment volumes and revenue. Genting Singapore also has to pay higher casino taxes starting March 2022, see the table below for more details.

Source: Ministry of Trade and Industry Press Release dated April 3, 2019

On the positive side of things, the exclusivity period for the two integrated resorts, Genting Singapore's RWS and Las Vegas Sands' Marina Bay Sands are extended to end-2030, effectively ensuring that the Singapore gaming market remains a duopoly for another decade. But there are some skeptics who think that the S$4.5 billion investment to expand the integrated resort is too hefty a price to pay.

Genting Singapore's share price and valuations (recall that the company is trading at a significant discount to its Macau peers on EV/EBITDA) should recover over time, as China's economic growth continues its long-term ascent and the market starts to appreciate the benefits and growth potential associated with Genting Singapore's S$4.5 billion investment for RWS's capacity expansion.

Investors in Genting Singapore have the additional sweetener in the form of a call option on a successful bidding for an integrated resort in Japan. In Japan, the bill to legalize gaming resorts was approved at Japan's upper house plenary on July 20, 2018. Three integrated resort/casino licenses are expected to be awarded in Japan with Osaka being the first. On June 13, 2019, it was reported that Genting Singapore is one of seven major casino operators (which includes names like MGM Resorts (NYSE:MGM), Melco Resorts (NASDAQ:MLCO), Wynn Resorts (NASDAQ:WYNN), and Las Vegas Sands) which registered for the request-for-concept for the proposed Osaka Integrated Resort. Industry consultants speculate that the award of the license will happen in mid-2022 and the Osaka casino should open in 2026-2027.

Genting Singapore is widely expected to be one of the front-runners and strong contenders for the three integrated resort/casino licenses for Japan.

Firstly, Japan is concerned about problem gambling, and a Forbes article titled "Three Lessons Japan And Macau Can Learn From Singapore's Casino Oversight" published on June 1, 2019, highlighted that "national surveys show solidly negative sentiment (on the new casinos), largely due to problem gambling concerns" and "Singapore remains Asia's gold standard for integrated resort development." This suggests that Genting Singapore, with its experience building and managing an integrated resort in Singapore, could be favored by Japan's regulators seeking to mimic Singapore's success in dealing with problem gambling. Singapore's National Council on Problem Gambling estimates problem and pathological gambling rates of Singapore residents was 0.9% in 2017, representing a significant decline from 2.6% in 2010 when the Singapore integrated resorts first opened their doors.

Secondly, as highlighted above, Genting Singapore is in significant net cash financial position. The worst-case scenario for Japan regulators is that a casino operator, which gets awarded the license, delays or fails to complete the construction of the integrated resort due to financial difficulties. Genting Singapore's strong net cash balance sheet stands in sharp contrast to the net debt positions of the U.S. gaming companies like Las Vegas Sands, MGM Resorts, Wynn Resorts, and Caesars Entertainment (NASDAQ:CZR).

Thirdly, Genting management has expressed confidence in a successful bid for Japan. A Business Times article published on April 18, 2019, quoted Genting Singapore executive chairman Lim Kok Thay's comments at the company's Annual General Meeting:

Fortunately for us, the Japanese government has made it very public that they will use the Singapore model...We have become the top tourist draw in Singapore and also contribute to employment and the local economy. I believe that is exactly what the Japanese government is looking for, whereas our other competitors bar one who is across the road wouldn't be in the same position to claim that they can do it.

Gaming industry consultant Global Market Advisors estimates Osaka Integrated Resort to generate $5 billion in annual revenues. In comparison, Genting Singapore achieved a revenue of $1.8 billion for FY2018.

A further decline in Chinese VIP volumes due to U.S.-China trade tensions and the slowdown in the Chinese economy is the bear case for Genting Singapore.

Closing Thoughts

Both Pico Far East and Genting Singapore profiled in this issue of the Asian Idea Generator Weekly, have seen their share prices being punished for the cyclical nature of their businesses and short-term uncertainties relating to current economic conditions. Their current share prices and valuations are offering attractive entry points for patient, long-term oriented investors. In the near-term, the global economy could potentially weaken further and continue to put pressure on the companies' share prices. Over time, the market is likely to re-rate the two companies positively and recognize their long-term growth potential and investment merits, once short-term economic concerns dissipate.

Peter Cundill is one of the deep value investors I have immense respect for. Relying on insights from his biography "There's Always Something to Do: The Peter Cundill Investment Approach," I screen for Asian stocks using the quantitative investment criteria outlined in the book.

Disclosure: I am/we are long GENTING SINGAPORE LTD [GENS:SP]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.