China's Poly Culture Group Shows Strong Results

Skate's just published a report on the first half 2014 financial results of Chinese auction house Poly Culture Group. The results are strong, as well as the auction house has a stockpile of cash totaling $333 million. Although not mentioned in the Skate's report, Poly Culture was one of the supposed bidders in the possible sale of Bonhams as reported by the Financial Times and posted on the AW Blog back in July (Click HERE to read).

According to the report, the auction segment of Poly Culture contributes about 75% of the profits, and the returns are and margins are strong, and when compared to Sotheby's, they are operating more efficiently.

Skate's reports

Poly Culture Group Reports Strong Results, Emphasizes the Growth of Its Art Segment, $333m in Cash to Play with

Poly Culture Group, the largest Chinese auction house listed in Hong Kong and the second largest company in terms of market capitalization in Skate's Art Stock Index, reported its interim 2014 (six months) results today. In short, numbers are good, the firm's art business is robust, and all this is very welcome news to Poly shareholders who have watched the firm's stock trading 20% below IPO price (Poly listed in March, see Skate's detailed coverage of Poly IPO).

The first results reported by Poly since the firm went public on March 6th of this year portray strong growth of both revenues and profits, and a healthy balance sheet. The firm's revenues are up by 15% in RMB terms (16% in USD terms due to Chinese Yuan appreciation to US Dollar this year) for the first six months of the year compared to the same period of 2013. The net income is up by 10% in RMB terms (11% in USD terms). In USD terms Poly generated $169m in the first six months of 2014, of which $84m can be attributed to their art business and auctions segment. This compares to $493m in revenues produced by Sotheby's for the same period (see Skate's coverage of Sotheby's six months results).

In terms of the segment breakdown, the art business and auctions segment remained the largest part of Poly's operations and produced the highest topline growth - 24% in RMB terms (25% in USD terms) for the six month period, now contributing to exactly half of their total revenue (46% a year earlier). Interestingly enough, Poly's net income for 1H 2014 was just half that of Sotheby's for the same period ($34.32m and $71.75m respectively). Given that art business contributes to about 75% of profits of the firm's auction group, Poly operates a much more efficient business model than Sotheby's. With its art business being 6 times less in sales, Poly generates just 2.7 times less profit, making the firm's net art business margins more than double that of its competitor.

Following IPO, Poly has a very strong balance sheet - the firm has negative net debt (i.e. more cash than debt) and its cash position doubled to RMB 2.1 billion (USD 333 million) as of June 30, 2014.

Poly is clearly committed to its art business and auctions segment as the key growth area including focus on developing new categories, looking for more consignments around the world, and expanding auction presence to more Chinese cities.

The art business segment is by far the most profitable part of Poly's operations, generating 49% gross operating margin versus overall 30% gross profit margin, and is heavily concentrated in mainland China (90% of revenues), with the balance coming from Hong Kong.

Art Business and Auction Business

Poly Auction Beijing will adopt specific strategies according to market changes and increase the sourcing scope and efforts, so as to secure its dominance and market share in leading categories. While taking efforts in improving professionalism and refined services to heighten brand influence, it will opportunistically establish branches and hold special auctions in places including Xiamen, Shanghai and Shandong to cater for local market needs. Priorities will be placed on the 27th and 28th boutique auctions as well as the 2014 Autumn Auction.

Poly Auction Hong Kong will press ahead with its boutique strategy. It will take into greater consideration the demand of collectors in Hong Kong, Macau, Taiwan, Southeast Asia, Europe and the United States to expand the portfolio of international buyers, and enhance overseas sourcing to further expand the variety of items. While focusing on contemporary art to strengthen marketing in Southeast Asia, it will vigorously expand the antique, jewelry and timepiece business in an innovative approach to ensure the success of the Autumn Auction.

Poly Art Centre will give full play to its established gallery channel advantages in Beijing and Guizhou to boost sales. A wholly-owned subsidiary will be established in Hong Kong to upgrade its international business. The priorities in the second half of 2014 include effective sales, well-paced sourcing and a reduction in debts to ensure profitability.

Poly Art Investment will devote to management of the existing projects, and proactively diversify the sourcing and selling channels to ensure smooth project operation. Meanwhile, it will strengthen development of new projects and offer more partnership options to secure business growth, aiming to provide consultation services for one or two additional artwork funds in the second half of 2014.

Source: Skates