RCG Holdings Limited

 Transcript
 
RCG Holdings Limited
Interim Result 2010
 

Attendant
Dato' Lee Boon Han (CEO)
KC Chong, (CFO)
Lawrence Ying, (Acting COO)

Start of Transcript

Mr. Lawrence Ying:

Good afternoon, ladies and gentlemen. Welcome to the presentation of the Interim Results of 2010 of RCG Holdings. We will now have our CEO, Mr. Dato' Lee, to give the presentation.

Dato' Lee Boon Han:

Thank you. I assume everyone has the presentation slides? Today with me, Lawrence is my ED and KC is our CFO as well as our Executive Director.

I will go straight to page 4, which is on the Business Highlights for the first half. Well, in the first half of 2010, we have been very focused in Indonesia and Southern China. As you can also see that we have an acquisition in Southern China, that is Strong Aim Limited, which is specialised in doing RFID phones and RFID tags, in particular targeting the anti-counterfeit segment of business.

We continue to develop into government segment. We have some contract wins and I will come to contract wins later. We also have some contract wins in Southeast Asia as well as the Middle East.

We also in development wise, we continue to look into the Internet of Things which is IoT. I think the Chinese Government and the Chinese customers are quite excited over this IoT and M2M products.

We have launched two key products on this IoT segment, one is called RCG 1 Kad One system, or some of you call One Kad system. These are basically targeting at the educational segment of the business. We also have RCG Guard Tour Monitoring Solutions. Both these products are for our key customers in the education segments.

I will move onto page 5, which shows only a few customers we managed to penetrate in year 2010. We have customers in China like China Mobile in Sichuan and Beijing 999 Emergency; we have Guardforce in Hong Kong; we have Marina Island Pangkor in Malaysia; we have National Bank of Abu Dhabi in the Middle East; we have Bank of Sharjah in the Middle East as well.

We remain business partnerships with IBM, HP, Motorola, Microsoft, Tsinghua Tongfang and CSST in China as well.

In the first half we managed to get some awards and recognitions. Particularly we want to mention three of them. The first one is the Frost & Sullivan Differentiation Excellence Award. The second one is the RFID Industry Development Award and the third one is the RFID Technology Development Application Award. I think we will continue to get awards for the next half as well as next year.

On page number 7, 8, and 9 basically we are still on the same segments of business. We are doing consumer, enterprise, projects and solutions. Basically, consumer, I have to repeat a little bit, as maybe there are some newcomers here.

Consumer-wise we are still focusing on a few key products like, Windows Logon, the m-series, which is a door lock system, BioMirage Coffer, iTrain which is an educational system for the Ministry of Education as well as for training purposes. These consumer products are lifestyle products. Our strategy of consumer products is more on convenience for everyday life and we have some design uniqueness and we sell them through distributors. This first half we had a new launch of consumer product which is for Windows 7.

The second part is business segment. Business segment-wise, we still remain our i-series, s-series and k-series. We have introduced new series like XL-1000 and EL-1000 and other RUS- series which are more on the industrial usage.

The strategy of how we push these products is through our channel sales. To date we have about 1800 distributors worldwide.

The third segment is the Project Solution segment. We are particularly excited over this area. As you can see later, we have quite a substantial growth. Within the first half we have introduced quite a number of new products like Laundry Management System, and as I mentioned just now the Guard Tour Monitoring solutions. We also have IT Asset and Data Management solutions; Document Management systems and RFID Ticketing Management solutions.

Basically all these products we work with system integrators as well as partners, we call premium partners, to push these products to the government or semi-governments. As you know, in certain countries, being a foreigner we are not allowed to participate directly in tenders or in government projects. So we have to use a premium partner to front us in order to get the projects.

Financial Highlights, I will leave it to KC first.

Mr. KC Chong:

Generally the first half of this year we have achieved revenue growth of about 11.5%. The top line is HK$1.44 billion achieved for the first six months. This is in comparison to about HK$1.29 billion in the same period last year.

The gross profit increased by 0.8% to HK$668 million. The gross profit margin dropped by about 5% to 46% compared to 51% in the same period last year. I will elaborate more on the reasoning behind all these figures but generally let me run through the slides.

EBITDA increased by 4% to HK$486 million. The net profit slightly decreased by about 1.5% to HK$371 million. Adjusted profit before tax, this is when we take out the amortisation charges, increased by about 8% to about HK$483 million.

Basic EPS is down 12% to HK$1.36 per share. Adjusted EPS is also after we take out the pre-amortisation charges dropped by about 6%. These two EPS figures dropped because of the increase in the number of shares issued since the end of 2009 and the first half of this year.

Increased working capital requirements due to lengthening of the AR periods, account receivables for this period ended 30 June is about HK$1.3 billion compared to about HK$800 million in the same period last year.

The increase is generally because of the extension of credit period to our customers. As I mentioned earlier in this same room some months ago when we announced the full year result, some of our customers are facing some financial difficulties or facing some cashflow constraints, therefore we have increased our AR period on a case-to-case basis for certain customers and we have lengthened it to 180 days. So the AR days for the first six months of this year is actually 133 days compared to about 96 days in the same period last year.

However, we are able to maintain a low bad debts provision which is still below 1%.

Moving to the next slide is the Income Statements. As in the financial highlights earlier, the turnover increased by 11.5%. Most of the increase came in from the Project side. I will elaborate more on this later.

The cost of sales increased by about 23%. Gross profit is up by about 0.8%. The margin dropped to 46% from 51%. Generally in the first half we have seen some increasing competition from lower end products. So what the management has decided is to increase our marketing activities as well as some pricing adjustments.

I will explain later on in the central costs that the marketing activities have increased tremendously in the first half. The other reason for the drop in the GP margin is because of the increase in sales of IT products.

We are now a distributor for Acer and Toshiba Notebooks. These computer items carry lower margins but we are using these as our channel to bundle our FxGuard Windows Logon software with these computer items and therefore increase our sales of these products.

The central costs, as I mentioned earlier, there are two components here. The selling and distribution costs as well as the administrative costs. These central costs increased by about 4%. The bulk of the increase actually is from the marketing expenditure which has gone up by about 90%.

Because of the competition in the market we have increased our intensity in marketing activities and therefore with the intention to maintain our current market share.

EBITDA is up by about 4% to about HK$487 million. Tax has gone up by about 17% to HK$ 4.9 million and profit after tax therefore is HK$371 million, which is slightly down from the same period last year by about 1.4%.

The net profit margin at about 26% compared to 29% in the same period last year and diluted EPS is at HK$1.35 per share versus HK$1.55 basically because of the increase in the number of shares issued.

In terms of contribution from the various business segments, consumer has gone up by 17%, basically due to two reasons. The increase in the sales of IT products as I mentioned earlier, as well as the reclassification of two previously enterprise products which we feel are more reflective if we classified them as consumer products instead.

So the increase of 17% the consumer segment now contributes about 44% to the overall top line with a margin of about 39%. Enterprise products because of the reclassification and because of some pricing adjustments to our Biometric products came down by about 11%, which now contribute about 30% to the overall top line with a margin of about 50%.

The Solution Projects, this is the part where the management has been focusing on over the last two financial years. This has improved from a 20% contribution to about a 26% contribution to the top line with a margin of about 54%.

Geographically, Southeast Asia is still our key market, increasing their sales by about 31%, now contributing about 53% to the overall top line. The Middle East contributed about 18% to the top line, which is an increase of about 7.5% compared to the same period last year.

China on the other hand, we are witnessing some slowdown in project implementations. China is pretty much a project focused market. Because of the slowdown in the first half of this year, we are seeing some project delays and therefore we have the delay in billing as well. China contracted by about 11% year-on-year to about HK$411 million top line, which is about 28% of the overall sales. Other regions are pretty small at 0.4% of the overall turnover.

In terms of cashflow, this is the part where the management is very concerned and very focused on managing. Our operating profit is about HK$380 million with a cash and cash equivalent of about HK$265 million in the bank. Cash generated from operations is about HK$23 million, this is compared to about HK$6.5 million in the same period 2009.

The cash conversion ratio is now 6% versus 1.7% in the same period last year. The AR days as I mentioned earlier is about 133 days versus 96 days in the first half of last year. The AR increase is mainly because, as I mentioned, we have increased the debtor days collection period for some customers as well as the increase in projects contribution to the top line.

Projects typically have a longer implementation period and longer gestation and therefore will take longer to collect.

Inventory turnover increased to128 days from 95 days. The increase in inventory reserve is basically due to the increase in the number of contracts we have signed up.

Balance Sheet wise, fixed assets have dropped slightly by about 6% mainly because of depreciation. When we say long term assets, these are contract rights from the acquired companies we have acquired over the last few years. Long term assets are now at HK$ 1.18 billion, slightly up by about 12%. This is mainly because of the additional acquisition we have done in April this year of a company called Strong Aim.

Goodwill and R&D is about HK$566 million. Goodwill is basically companies and subsidiaries we have acquired in the years 2006/07 that are sitting in the balance sheet as goodwill. We are valuing this goodwill on a six-monthly basis.

R&D expenditure incurred during the period and as well as in the previous period where there is no visible revenue stream from these products that we are developing. Therefore we capitalised the expenses and it will be amortised to the P&L as these products are being introduced into the market and revenue streams are flowing in.

Current assets at HK$2.8 billion including about HK$1.3 billion in AR and a prepayment of about HK$67 million that we have paid for the purchase of a Beijing commercial space for which currently we are applying for the title. In Beijing, we cannot classify this purchase as a fixed asset as yet until the title is out which normally takes about 12 to 18 months. That is why it is still sitting in the current assets and not in the fixed assets.

Total liabilities are at about HK$410 million, pretty small comparatively and therefore the net assets of the company are at about HK$4.6 billion.

Dato' Lee Boon Han:

Following on page 16 is some commentary. These are some of the answers we want to provide to some of the shareholders which they have put up on the internet. I think there are basically four key questions.

Particulary the first one is; how does the unsettled global economic environment affect RCG’s business?

I think we are operating in countries that are less affected by the slow economic areas and number two we are moving forward to focusing on Indonesia, Vietnam and particularly we have a new partner, that is Pari Group that recently just subscribed to some part of our shares.

We are trying to form some collaboration and hopefully we will be able to benefit in the European market. Followed by the government segments, as you will notice that the government segments in the Asia Pacific in fact quite recognise RCG products as a whole.

We have been in talks with Thailand Immigration and hopefully very soon we will see some projects going to be awarded from them.

The second question basically is; how is the share overhang issue affecting RCG?

I think this still remains the same. The two key shareholders are still there, the overhang is still there. What I can say is basically the strong fundamentals are still intact. We still have very low PE. Of course as a management. we try to run the company to the best we can. We have to leave it to the disputing shareholders to settle by themselves.

The third question basically is on the corporate governance. As you will notice that now the Chairman and CEO roles have been split. Raymond becomes the Chairman and I have become the full CEO. I will run the day-to-day operations, including putting up some strategies for the company while the Chairman oversees the Board.

Then followed by the new appointment of the CEO, which is the appointment of the ex-Federal Court Judge, who is now being our new Board of Director on INED. Together with a former Air Vice-Marshal from Indonesia - that is why you will notice we go to Indonesia now; we have a new Board member who has just joined us, that is Mr Pieter Lambert Diaz Wattimena, came into our Board.

The fourth point is basically how do we manage our cashflow? Basically we will continue to get into the government contracts to ensure visibility. Management will have cost control measures and debtors control measures to hopefully by the end of the year we should be able to improve on our cash conversion.

Overall outlook - basically there are a few key points. Expansion into Southeast Asia, Indonesia and China, Southern China especially. The new opportunities for government contracts and other good news is we are almost near to closing a deal with the casino in Malaysia and Singapore with over RFID solutions.

As I mentioned just now the Immigration Department in Thailand, let’s hope the contract will come in a.s.a.p. Indonesia-wise we are in talks with a semi-government linked company for providing them with some RFID payment gateway. Another one is IT company, an internationally recognised IT notebook seller. We are also very close to introducing our Windows Logon to their website and bundling it with their PC and their notebooks.

The second part is we will be integrating those acquired companies that we have bought throughout the past couple of years, these are; Vast Base, Chance Best, A-1 and you can see Strong Aim which we just recently acquired. We are going to bring that product into other parts of Southeast Asia as well as the Middle East.

In the Middle East, in fact, we have certain contracts we are trying to provide RFID phone to some public transport operators.

On new revenue streams, the management currently at the starting of getting in renewable and green technologies. As you can see, we have our new partner as strategic investor, that is Pari Group, that has subscribed to our shares. They are particularly very strong in doing healthcare, asset management as well as green technology.

We are going to start, hopefully, to explore collaboration between both parties. We are trying to learn from them what all this green technology is about and how we could put a foothold in Southeast Asia with the experience that they have.

Overall I would say we are cautiously optimistic. I wouldn’t say we are Superman. I think we should be in line with the market expectation until the end of the year. With the contracts I mentioned just now, I think we are quite comfortable we can get in line with the market expectations anyway.

Mr. KC Chong:

Any questions from the floor?

Mr. Lawrence Ying:

Because we are having the recording for this presentation, please have the microphone and then you can ask your questions. Thank you.

Question:

Hi, could you give us maybe perhaps a little bit of outlook for H2 in terms of your margins. Are you able to give some sort of guidance on what your expectations might be?

Mr. KC Chong:

Well I think in terms of the gross margin, I am looking at around the first half region or maybe slightly lower. The two main reasons are because of the increased contribution from the IT products as well as the pricing strategy that we are adopting at this moment.

In order to be competitive we cannot maintain our margin at such a high level. We are expecting some erosion but it will not be a major drop in terms of margin. There is still sufficient margin for us to play around with.

I am looking at in the region of between 40% to 45% for the full year. So I believe it’s still a very healthy margin overall.

Question:

You mentioned Beijing and that it looks like you are acquiring some office space or renting some commercial space?

Mr. KC Chong:

Yes.

Question:

Can you talk about that a little bit?

Mr. KC Chong:

Yes, basically management has decided to invest into properties in Beijing in view of the increasing rental expenditures. Since we started in Beijing three or four years ago, we have seen a tremendous increase in rental expenses.

So for the long run we think it would be better to have our own office in Beijingand our team will be relocating to the new office next month. We have about 20,000 square feet. As you can see in the presentation slide, it costs us about HK$67 million.

In general the office space is sufficient for us to grow for the next five years and probably we will rent out part of the offices for the time being which we may not be using. But in terms of a long term investment we believe the deal is good and that the investment will actually save us a lot of rental expenses going forward.

Question:

Hi, on the accounts receivable, it is quite a large increase from previous years. What do you see for the second half of the year going forward?

Mr. KC Chong:

Well I’m hoping to maintain the AR days at about 130 days for the full year. So if we can achieve that then we are looking at maybe about the same level of AR or close to it for the full year this year.

So we are tightening our credit control. Definitely credit control is a major concern and we are managing it very tightly. Cashflow planning is also one area that we will be looking at. Capex wise we are planning to incur maybe about HK$200 million for the current year for capital expenditure.

The bulk of the Capex will go to research and development. We have to stay ahead by improving our product range and improving our product quality. These are some areas that we will spend a lot of money on.

The AR if we can maintain that we should be able to fund our R&D activities for the next six months. But if we are to move into areas like M&As, acquisitions, then we probably may have to go to the market and raise some funds.

Let me just give you a brief update on the shareholding structure. If you don’t mind turning to page 24. This is the latest shareholding structure of RCG. Our major shareholder is still Veron at 22.60%. The Offshore Group is now 20.14%, while the Full Future Group belonging to our Chairman is now 6.4%.

Our total issued capital is 290.5 million shares. The distribution of the shareholdings is now 74% in Hong Kong and about 26% in UK. So the majority of the shares or shareholders are now in Hong Kong compared to previously in AIM.

Question:

I think you’ve answered this question already but just for clarification. Going forward can the shareholders perhaps expect any further dilution of EPS? I mean do you have maybe M&A on the horizon for the next six months or fund raising exercises that you might do?

Mr. KC Chong:

Well at this point in time, as my CEO mentioned just now, we have a few proposals or few targets on the table. Nothing is concrete at this moment. I don’t think it’s appropriate for us to make any disclosure here. But suffice to say, some of these M&A targets will require us to go to the market to raise the money to do the acquisitions.

But we will be negotiating with vendors. We may possibly come out with the structure where part of the acquisition consideration will be in shares and partly in cash. So that may possibly be the due structure that we will strike.

But it’s still very much on a negotiation stage.

Question:

In terms of M&A opportunities which countries are you talking about for those projects that you have in discussions?

Dato' Lee Boon Han:

Basically there are three countries that we are targeting. Of course, one is in China and we have one we are targeting in Indonesia followed up by another one in Malaysia. So we are evaluating them and as well there is another one from Europe.

Dato' Lee Boon Han:

Thank you very much.

End of Transcript