The Motley Fool

A Chat With Design Studio Group Ltd’s Management

Recently, I had the chance to meet the chief executive officer of Design Studio Group Ltd (SGX: D11), Edgar Ramani, and the company’s acting chief financial officer, Ronald Kurniadi, to learn more about the business and its growth plans.

As a brief background, Design Studio was founded in 1992 and is a high-end interior fit-out and joinery manufacturing firm with automated manufacturing facilities in China and Malaysia. It has completed several residential, hospitality, retail, gaming, and cruise line projects in countries such as Singapore, Malaysia, China, and the US.

Meeting a company’s management team can give us added insights that cannot be gleaned from reading annual reports alone. With that, here is what I learnt from Edgar and Ronald:

1. Depa Group, one of the world’s leading providers of interior solutions, held 89.6% of Design Studio’s shares, as of 7 March 2017. Edgar said that Depa does not get involved in the day-to-day operations of Design Studio and it gives Design Studio the autonomy to run its business.

2. When asked if Depa is looking to privatise Design Studio or if it is thinking of doing something to increase the liquidity of Design Studio’s shares, Edgar could not comment as he is not privy to the information.

3. Design Studio does not get automatic contracts for Depa’s works without tendering for them.

4. Design Studio undertakes projects with repeat clients. However, the company would still need to go through the tendering process just like any other firm.

5. In Singapore, Design Studio is one of the leaders in the hospitality and commercial space. As for the residential arena, it used to be one of the leaders, but the business had taken a hit over the past two years with the slowdown in the property sector. The improving sentiments in the property market in recent times are presenting opportunities for the company.

6. Design Studio has also done interior fit-out works at malls and public spaces, on top of residential, hospitality, and commercial projects. One example is the fit out of the Robinsons retail store in Kuala Lumpur, Malaysia. Design Studio has also previously worked on projects for Robinsons in Singapore and Dubai.

7. The company has a competitive edge in joinery manufacturing with its production facilities in China (a fully-automated factory) and Malaysia (a semi-automated factory). It has also recently commenced a revamping of its factory in Malaysia with a new management team, and has started upgrading the facilities and equipment to make it more efficient. Design Studio’s main manufacturing facility in Singapore, meanwhile, has been moved to Malaysia to reduce overhead costs. Some key components are still manufactured and assembled in Singapore, but the bulk of the manufacturing activity now happens in China and Malaysia.

8. The company does not have projects that give it recurring revenue. The closest are contracts that last a few years which are executed in phases. For example, in Kuala Lumpur, Design Studio has a two-and-a-half-year, three-phase contract to upgrade the Mandarin Oriental hotel.

9. Design Studio’s largest competitor would be Sunray Woodcraft Construction Pte Ltd. According to Sunray’s website, it is “Singapore’s largest Interior Fit-out, Addition and Alteration works specialist”.

10. The plan now for Design Studio’s management team is to stabilise the business and then expand it. Expansion can come organically and inorganically.

11. The company will not be going out to secure projects just for the sake of increasing revenue. Its focus is on high-end projects, where Design Studio has an edge in terms of value-add and manufacturing. The company will be staying away from pursuing low margin contracts which could potentially increase its risk profile.

12. Regarding expansion overseas, Design Studio has already expanded in areas it has a presence in, for example, in China. The company currently has projects in Guangzhou and Shenzhen. It will not expand to other areas that it is not familiar with – such as Beijing, Shanghai, and Hong Kong – until it has a stable base workload in Guangzhou and Shenzhen. The company is also looking to enter “high-growth” countries where there are infrastructures already in place.

13. Design Studio is also looking to pursue projects in the cruise market, which is a significant market globally. The company has completed two projects with Carnival Cruise Line on the AIDA cruise ships in Japan where it supplied the joinery for the interior of all the passenger cabins. Other growth areas, which are in their infant stages, comprise of initiatives in virtual reality, smart furniture and rooms, and 3D printing on a large scale. The company has already commenced projects in this innovation space and should reap benefits in the coming years.

14. There have been recent management changes and “change is not easy.” Now, Design Studio is starting to see results from some of the initiatives the management team has implemented. The company has begun to win more projects in the third-quarter and fourth-quarter of 2017. In Singapore, it had recently secured key projects such as Funan with CapitaLand Mall Trust (SGX: C38U), and Outpost Sentosa hotel with Far East Hospitality Trust (SGX: Q5T). Works have already started for the secured contracts, even though the properties would not be ready until 2019. For Funan, Design Studio is involved in the interior fit-out works for the serviced residence component, and some public areas in the mall.

15. The company has started implementing the Oracle ERP system to improve efficiency and cost-savings.

Design Studio released its 2017 full-year financial results on Monday, and the coverage can be found here. The company is preparing for a better 2018 after significant one-off items to the tune of S$8 million were charged in 2017, leading to a huge fall in profit.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Mall Trust. Motley Fool Singapore contributor Sudhan P owns units in CapitaLand Mall Trust.