Saturday 03 Jun 2023
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This article first appeared in The Edge Malaysia Weekly on November 7, 2022 - November 13, 2022

AFTER a roller-coaster ride in the financial year ended Dec 31, 2021 (FY2021), owing to the Covid-19 pandemic, Singapore Exchange-listed Sim Leisure Group Ltd has bounced back sharply. Not only has it regained its growth momentum, but it is also back to making money .

The theme park developer and operator, known for its Escape nature-themed parks, is on track to turn in a record performance this year on the back of strong visitor numbers, as well as higher admission fees at its three parks in Malaysia: Escape Penang, Escape Petaling Jaya and Kidzania Kuala Lumpur.

Founder and executive chairman Datuk Sim Choo Kheng says park attendance has already exceeded pre-pandemic levels since the country reopened its borders to international visitors in April.

“There are several factors driving this growth: pent-up demand and new attractions that we put in place before and after the pandemic such as the zip coaster in Escape Penang in May,” he tells The Edge in an interview.

While revenue rose 85% year on year to RM17.69 million in FY2021, owing mainly to a cooperation fee arising from a coopera­tion agreement, Sim Leisure swung to a net loss of RM11.8 million from a net profit of RM8.46 million in FY2020, as its theme parks were closed for much of 2021 because of the Covid-19 lockdowns.

“[Amid the lockdowns,] we had no income, but we still had to maintain the parks and pay salaries,” Sim recalls, noting that executives took a 30% pay cut while some employees left the company and found work in other industries.

Sim Leisure got back on its feet quickly, posting a net profit of RM8.38 million for the six months ended June 30, 2022 (1HFY2022), almost amounting to the full-year net profit of RM8.46 million in FY2020. Revenue increased 419% y-o-y to RM26.57 million in the period.

Sim believes the FY2021 loss is just a one-time blip and that the worst is over for Sim Leisure.

“We have turned around,” declares Sim, the single-largest shareholder of Sim Leisure, with a direct stake of 55.29% as at March 22, 2022. Tan Boon Seng, the eldest son of the late Datuk Vincent Tan of the Dragon-i Group of restaurants, is the second-largest shareholder, with a direct stake of 1.21% and an indirect stake of 25.74% through his private vehicle Desamal Capital Sdn Bhd.

Sim is confident that the group can achieve a new record net profit in FY2022. “We are expecting better results in the second half,” he says, noting that the last quarter of the year is traditionally the group’s strongest period, accounting for about 40% of revenue.

This year, apart from Escape Penang and Escape PJ, the group will also benefit from the addition of KidZania KL, which it had acquired from licensee Rakan Riang Sdn Bhd in December 2020 for RM3.8 million. Rakan Riang is 80% held by sovereign fund Khazanah Nasional Bhd and 20% held by Boustead Holdings Bhd.

Sim also sees the group’s results improving because of a higher level of efficiency. “Today, all of our business is online. We were one of the first theme parks to implement online ticketing in 2013. The pandemic has accelerated consumer adoption of online ticket purchases. For example, before the pandemic, online sales used to account for 80% to 90% of total sales. They now make up 100%. There is no longer a need for ticket counters,” he says, adding that 80% of its customers are aged between 15 and 35.

Back on the expansion trail

After a year of setbacks, Sim Leisure is looking to resume the expansion of its local and global footprint.

“We have been getting a lot of enquiries — two to three a week — to develop and operate Escape parks from both landowners and mall operators, who are looking at ways of enhancing their developments,” says Sim.

According to Phil John Whittaker, who assumed the role of CEO of Sim Leisure on July 1, as the shopping mall sector still suffers from oversupply, landowners and mall operators are looking for ways to differentiate their offerings by using entertainment as an anchor, other than the traditional offering of a department store. “We have become like a modern-day department store. Covid-19 has made people less complacent. People don’t take things for granted so much anymore. They want to reconnect with nature and each other. They are looking for experiences and we are actually the perfect space for that,” he says, adding that the weaker ringgit has also boosted local travel.

Sim concurs. “We are still affordable, and we come up with new attractions every six months. We will close less popular or outdated rides to keep ourselves ahead of trends.”

Two new Escape outdoor theme parks in Cameron Highlands and Ipoh are currently under development, and the group is in advanced discussions for the development and operation of Escape parks — both outdoor and indoor mall versions — in the Klang Valley, Johor, Cherating in Pahang, Terengganu, Sabah and Sarawak.

Sim notes that the Cameron Highlands park design has been completed and the company is awaiting permission from the authorities to begin construction.

Whittaker says the plan for the new park in Ipoh, which will open next year, is to make it Southeast Asia’s team-building capital. Currently, the corporate event/team building business segment makes up about 25% of Sim Leisure’s business, he adds.

The group is also looking to take the Escape brand abroad. “We are also currently working on an Escape Park in Sri Lanka, which will be our first international park outside Malaysia, and exploring new parks in Oman, Qatar, Saudi Arabia and China. The whole [Sri Lanka] park project started even before the pandemic but was suspended because of Covid-19, as we couldn’t travel. But the project is now back on track. Construction is set to start soon and to be completed by the end of next year,” says Sim.

The group has started the groundwork for expansion in China and has been waiting for it to lift its lockdown and reopen its borders.

Sim says the group’s expansion would be focused on countries in Southeast Asia and the Middle East, as well as China and India.

“We will not go beyond that because we are looking at numbers/population and these are regions/countries with growing populations. We are selling something very affordable. Escape parks target the mass market, unlike some of the big brands that are targeting the top 10% to 15% of the public who can afford US$120 [RM570] to US$150 per ticket. It is a completely different genre.

“Europe and North America are out of our radar. The [theme park] market in Europe and North America is already saturated and the population growth has also plateaued,” he says. “We want to make Escape a world-class brand. We want to be the best in the world, not just in Malaysia. That is our vision.”

Having acquired KidZania, the group is also exploring opportunities to expand its involvement with the franchise.

Whittaker says: “Currently, we have the [franchise] licence to operate KidZania in Malaysia but we are in close contact with KidZania’s Mexican franchise owner to look into opening sites overseas.

“We wouldn’t put a second KidZania in Malaysia; the market is not big enough. There are not enough corporate brands in Malaysia to justify two KidZanias, as corporate sponsors [the foundation of KidZania’s business model] account for about 40% of revenue.”

The group is in discussions to buy “a few distressed assets overseas”, Sim discloses, but nothing has been firmed up. “We would be specific in our acquisition. Like KidZania KL, I believe in the role-playing edutainment concept. We would not touch mechanical theme parks, however, as I believe that is a sunset industry.

“We acquired KidZania KL in December 2020, which was a distressed asset. We didn’t expect the pandemic to last this long. We were hoping to be able to operate the facility in early 2021, but that didn’t happen. Since we reopened KidZania KL in October 2021, we have managed to turn it around from May this year.”

Asset-light investment model

Sim says the group does not intend to undertake any fundraising exercise. As at end-June 2022, Sim Leisure had RM20.51 million in cash and bank balances, and RM15.04 million in debt for a net cash position of RM5.47 million.

“When we acquire something, it should be affordable to us. Of course, there would be some capital expenditure (capex) allocated to improve the parks.

“Our current investment model is to go asset-light. Thus, we don’t foresee the need to raise money [from debt and capital markets] in the immediate future. We are working on many projects that are going to be funded by the landowners, although I would not completely rule out [the possibility of owning a theme park]. Our current and future short-term cash flow position looks healthy. We want to focus on using other people’s money,” Sim says.

Citing Sim Leisure’s new projects in Ipoh and Cameron Highlands, for example, Sim says the landowners will fund the construction works and the group will design, build and operate the parks. It will also pay the landowners 10% per year of the capex cost or revenue, whichever is higher.

“In addition, we commit a minimum 5% of the gross turnover for annual reinvestment. This is important because, typically, the landowner will put up the capex once and all future capex will be put up by us. So, they are guaranteed new rides and activities, and the theme park will continually be refreshed,” he says, adding that, typically, the group will manage the park for at least 30 years.

While the group typically pays an annual dividend of at least 30% of its net profit, it did not recommend a dividend payment for FY2021 to conserve cash in view of the pandemic. Sim Leisure shares have gained about 63% since the beginning of the year to close at 24 Singapore cents last Wednesday, giving the company a market capitalisation of S$40.51 million (RM135 million).


Theme parks can be profitable but cost management is key

The perception that theme parks are unprofitable and difficult to sustain persists in Asia, including Malaysia. The RM520 million Movie Animation Park Studios (MAPS) in Perak, which opened in 2017 and was shut down in 2020, has reportedly been put up for sale after years of losses and poor management. The park was a 51:49 joint venture between Perak Corp Bhd and the Sanderson Group.

Hong Kong Disneyland is another example. It posted HK$2.4 billion in losses for its last financial year ended Sept 30, 2021 — its seventh in a row without turning a profit — amid a series of pandemic-related closures and a near-complete absence of tourists.

Sim Leisure founder and executive chairman Datuk Sim Choo Kheng contends, however, that a theme park can certainly be profitable and that all three of the group’s parks are making money.

“Our core competency is cost management. Many of the theme parks are owned by people who are not from this business. We are in this business and we understand how to drive cost efficiencies and productivity. Theme parks are a fantastic business, but it has been given a very bad name by people who are not in this industry,” he says.

While Covid-19 has halted Sim Leisure’s expansion plans, it is also considered a “blessing in disguise”, as it has weakened many of the group’s competitors that have not been managing their parks competently, says Sim.

“Many of the theme parks in this part of the world are non-standalone business units. That means they are part of real estate developments.

“Typically, most of these parks are not managed properly because they are not core to the owners’ business. They use the theme parks to enhance their real estate but they are not really in this business, which explains why many of the parks failed and had to be shut down. This is very unfortunate in this part of the world, not only in Malaysia but also in emerging markets in Southeast Asia as well as China,” he says, adding that the failures have affected the creditworthiness of the theme park business.

“These people spoil the [theme park] market. I am very frustrated about this. Many times, when we talked to banks or sought a listing [in 2019], many people did not believe us. They would mention some big names and say, ‘Are you sure you are better than these big boys? How can you be more profitable than these big boys?’ That is really an insult.

“We eat, sleep and dream about the attraction business. This is what we do for a living. We are specialists in our business; we are different from the rest of them. Unfortunately, the majority of the theme parks in Asia are owned by people who are not in this business — be it real estate or gaming,” he says.

“Our business is about low-tech, high-fun rides whereas most theme parks are high-tech and adrenaline-rush rides. Low-tech also means it is not as capital-intensive, but it needs a lot of creativity to make some of these games more fun.

“We are able to keep our overhead costs low as well. It is not because we are cheap but we are a lot more efficient. Our Escape parks are still international-standard parks, but we are able to design, build and install them by ourselves.”

Sim calls on the government to pay attention to the theme park industry.

“Non-standalone theme park operators shouldn’t be allowed to have access to tourism infrastructure funds. This gives the industry a bad reputation. Malaysia once aspired to become the theme park capital of Southeast Asia. So, there is no room for such residential theme parks if we want to be a theme park capital. All parks should be standalone business units. Then we will have a level playing field.”

Still, Sim does not think there is an oversupply of theme parks in the country. “From our perspective, the competition in our genre is still weak. The mainstream mechanical theme parks have been around for too long. There is no innovation. There are only five common types of rides in mechanical theme parks, including roller coasters, drop towers and carousels. However, nature-based adventure parks are refreshing. Future generations need to reconnect with outdoor recreational activities because of their sedentary lifestyles,” he says.

“These traditional theme parks are also very capital-intensive. We can build one whole [Escape] park for the cost of one roller coaster, or 10% of their budget.”


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