SINGAPORE (Apr 17): The Covid-19 pandemic has rattled global markets and investor sentiments worldwide in a manner similar to the Global Financial Crisis in 2008 and Dotcom bust in the 1990s. But for Chew Seng Kok, managing director of Kuala Lumpur-based but Singapore-listed Zico Holdings, the crisis presents a “tremendous opportunity” to tap on.
“Every time there’s a crisis, two things happen. Sellers who are desperate for cash will suddenly be prepared to sell what they were not prepared to sell,” Chew tells The Edge Singapore in an interview.
“On the other side of the equation, buyers who have the appetite and money to buy will find that they’re suddenly able to buy what they were previously unable to get their hands on at a price that’s more attractive,” he adds.
Following a restructuring last year, Zico, the multidisciplinary professional services firm, had opted to focus more on M&A advisories in the wealth and fund management spaces.
Therefore, the agreement signed with Yamada Consulting (YCG) on March 26 is a “perfect timing” according to Chew.
The deal will see the partners offer a joint platform for advisory and consulting services to bridge the funding gap between Japanese investors and Asean SMEs. Initial funding will kick off with contributions of between US$10–50 million ($14.3–71.2 million) from each of them.
Tokyo-based YCG — with more than three decades of history — has an extensive contact list of some 900 investors in Japan, says group managing director Go Sakano in the same interview with The Edge Singapore. At the same time, Yamada can gain from Zico’s help to break into the Asean SME market.
“With Zico’s support, we can have easy access to Asean SMEs, which is important to Japanese investors,” says Sakano. “We complementary each other. We bring ‘buyers’ and they bring ‘sellers’,” he adds.
Phone ringing non-stop
Chew says that SMEs — mostly family-owned enterprises — form the backbone of the Asean economy and with market value under RM500 million ($164 million). However, they do not have the same level of sophistication in the way they market themselves compared to many other companies.
“While these SMEs are proud of the way they have grown, they are not the most sophisticated in terms of the way their marketing techniques or brand presentation. So, they tend to “undersell” themselves when they go to the banks. This means they are not given much support and are often left alone,” he says.
According to Chew and Sakano, SME owners in the region are reluctant to sell a controlling stake to outside investors, yet they yearn for fresh management ideas and innovation new partners bring along which could help accelerate the company’s growth.
Chew agrees while the SMEs value financial assistance and support from banks and governments, they see external investors who can bring both expertise and capital as being more valuable. “There are many businesses that have said they can actually survive if they get the right partner to inject capital and take a small and strategic stake and then grow together,” he says.
Although it has only been one week since the collaboration was announced, Zico has received lots of interest from SME owners who are keen to find out more. Chew claims his phone has been ringing so much that he finds it “not funny anymore”. Meanwhile, Sakano says many potential Japanese investors are keen on companies with exposure to the infrastructure, energy, F&B and manufacturing sectors.
Aiming for 10 deals a year
While it is still early days, as of April 4, Sakano says 70 potential investors have already come on board, with more in the pipeline.
Chew says that Zico will start identifying potential SME targets from its database that meet the respective needs of the investors. To further ease the process, Zico has signed a collaboration agreement with two Malaysian sell-side advisory companies — Sage 3 and Andersen Corporate Restructuring — that will further wider its network of capital, business and expertise.
With these, Chew says the collaboration aims to conclude 10 deals this year, each worth US$25–30 million, or US$250–300 million in investments in total.
While he declines to disclose the commission Zico and YCG hope to make from each deal, Chew says it will be at the “market rate”.
“It should affect Zico’s revenue figures positively,” says Chew. “Every time we conclude a deal, we get something out of it, and this should add something positive to our company.” “We just can’t predict how much, but we would expect to earn fees out of this and to the extent if we succeed in closing many deals, the fees will contribute positively to the bottom line of our company,” he adds.
On Feb 28, Zico reported revenue for fiscal year ended Dec 31, 2019, dropped by 13.6% to RM77.8 million from RM90.1 million partly caused by a lower volume of capital markets advisory services provided by the company.
Between FY2018 and FY2019, the company went from earnings of RM5.8 million into a loss of RM7.9 million, weighed down by a one-off impairment on the sale of two subsidiaries, according to Zico.
In addition, Zico had to shoulder higher manpower costs to build up another private subsidiary, Zico Trust (S), which recently won a capital markets services licence from the Monetary Authority of Singapore to provide custodial services.
“This licence positions Zico well for trust-related services following the recent implementation in Singapore of the Variable Capital Company structure for investment funds,” states Zico in its earnings announcement.
Year to date, Zico thinly-traded shares have barely moved the needle. From 14 cents at the start of the year, the counter closed at 14.8 cents on April 15, valuing the company at nearly $48 million. At its IPO in 2014, the stock was priced at 30 cents each.
Virus worries
The official announcement of the collaboration between Zico and YCG was slightly delayed due to the outbreak of Covid-19. “We definitely did not plan for the virus outbreak,” quips Chew. “We actually started to come together at the end of last year, planning to launch at around January or February. That was our original timeline.”
But the pandemic turned out to be the impetus for the two companies to go ahead with the collaboration as they saw how businesses were grappling with cashflow crises.
“The urgency of people wanting to get help was so real that we decided to go ahead and announce it,” says Chew.
“The reason why we made the announcement was because our respective clients needed to know that we were doing something, and it’s a fact that both us have gotten a phenomenal interest from investors about how we can help them,” he adds.
However, Chew and Sakano are worried that some businesses will not survive past the virus crisis. “If the outbreak drags on, some companies may disappear before we can even talk to them,” quips Chew. “Let’s say this outbreak goes beyond July or August, they may be bankrupt by the time we want to talk to them and that’s my worry because many of them are really facing a cash crunch now.”
“For us to talk to them, they must exist. My worry is that the crisis will drag on to a point where the targets which were once attractive have degraded so much that they become unattractive or that they no longer exist,” he adds.
In addition, with so many countries coming under lockdowns and with air travel being restricted, this has made it difficult for businesses to continue as per normal. Emails and videocalls are poor substitutes to an actual face-toface meeting between potential partners, according to Chew. “For a deal to be successfully negotiated, the parties need to negotiate face to face, because it’s a serious business,” he says.
“The inability of people to travel to, say, Thailand to look at factories, will also delay things,” he notes. “These are what we call logistical delays but if the pandemic drags on, keeping the business afloat until we arrive to help may be the biggest challenge.”
