RC Group – right place, right time

Elderly council flat dwellers in central London in the habit of leaving home without their door keys could soon benefit from Dr Raymond Chu’s drive to expand his fast-growing Hong Kong-based biometrics business RC Group (RCG) outside South East Asia. Equally, interlopers passing themselves off as rightful tenants and residents claiming fictitious children could have reason to take fright at a pilot project under discussion that could see AIM-quoted RCG fit biometric and radio frequency identity devices (RFIDs) onto Westminster City Council’s housing stock.

Chu describes the Westminster proposal as ‘low key’, but sees it as the opening move in a campaign to make RCG and its brands familiar items in British retailers such as Dixons.

RCG, which raised a net £544,000 at 10p last July when broker Insinger took it to AIM, reckons the time is right to establish a wider international presence and broaden its shareholder base before too many competitors are tempted in to a booming biometrics market.

Chu says this could involve new share issues on AIM to broaden the company’s still narrow shareholder base. A shift in RCG’s domicile could also come up for consideration – ‘but only if we can get the tax position right’.

‘The idea is to use technology which avoids the problems of keys and passports and memories,’ says Chu, who in April opened a European sales office in the City of London. With the Government set on obliging the population to carry identity cards, and businesses from security companies to gaming concerns seized of the need for customer/client/occupant identification that does not depend on possibly-weary employees matching blurred signatures, biometrics and RFIDs are coming into their own.

Biometrics, which the USA is to fit into its passports, identifies a human being through physical features such as fingerprint patterns, retinal and iris scans, DNA and facial characteristics and ‘hand geometry’. RFID is a ‘wireless data collection technology using electronic tags for storing data’ about objects, which have the same function as bar codes or magnetic strips on credit cards and provide a unique identifier for the object in question.

RCG’s kit can catch employees punching in each others’ time cards and track freight consignments on the way from maker, via distributor, to purchaser. They can authenticate products and act as a versatile tool in the growing security market.

The group, which develops the software, supplies ‘solutions’ and has much of the product made cheaply by other companies in mainland China, pushed up pre-tax profits nearly 80 per cent last year to £2.1 million pre-tax, mostly thanks to exceptional gains, on turnover 36 per cent ahead at £3 million. Chu’s fans believe his expansion drive could increase this more than fivefold in three years.

Strategy

RCG began life as computer services provider Regal HK and has been expanding fast since buying security products and components trader Sky Well Group two years ago. Growth strategy involves moving into new markets and establishing joint ventures with big players, as well as seeking acquisitions among hardware and software sellers and systems integrators.

‘We are working on getting a big long-term partner,’ says Chu, ‘and perhaps a second one as well.’ The company already operates in Macao and Malaysia and, as a leading software producer in South East Asia, it sees ample scope for strengthening its position in what is as yet a highly fragmented business.

RCG has a memorandum of understanding for collaboration with GE Security of the USA, to help make inroads into mainland China, where it hopes to win showcase biometrics contracts for the Beijing Olympic Games in 2008. ‘China will be our best market this year, especially for RFIDs,’ says Chu, who says the company is working on warehouse management solutions there with Wal Mart and Tesco.

‘Price is the downside in China,’ especially on the biometric products side where competition is fierce, argues Chu, and that provides the incentive to push into other markets, including Europe, which ‘is behind the Far East in accepting new technologies’. RCG’s fingerprint and facial recognition products retail for between £11 and £2,600, while its more complex solutions go for anything from £55,000 to £1.1 million.

At present, the company’s customers include government departments in Hong Kong and the People’s Republic of China, as well as higher education institutions, quoted Hong Kong companies, entertainment groups, bars and restaurant chains and casinos. Winning the contract for Britain’s impending identity card system would be a coup, but, says Chu, ‘while we have the technology, to get government contracts you need longstanding connections’ – which RCG is working to establish, but has not as yet cemented.

Management

Raymond Chu, now 42, who is both chairman and chief executive, has a law degree from Bristol University and a British passport. After practising as a solicitor, he moved into property and corporate finance, spotting the potential of biometrics.

Insistent that he is ‘not an IT man’ and can therefore take more dispassionate commercial decisions than committed specialists, he has an 18 per cent stake, worth nearly £1.8 million, in RCG. Offshore Holdings, representing a ‘low-key’ co-founder R Chan, has 72 per cent. RCG’s deputy chairman and chief operating officer is Anita Chau, 31, who has helped run private Hong Kong companies in the surveying, property and marketing fields. The most senior non-executive director is Alan Chamberlain at 61, a former director of The European Newspaper, with experience in brewing and also on the board of AIM-quoted consultant Beaufort International.

Prospects

Chu asserts ‘we are lucky, because now we are a rare company in a new field. Soon the competition will come in, but by then the whole market will be bigger’ and RCG will have wider brand recognition. At present, with 90 per cent of its business coming from commercial customers, he would be wary about pitching for major government deals, such as British ID cards – ‘although down the track we do have the technology’ – until the company has established its heavyweight partnerships.

‘I don’t want to be like a little kid playing with the big boys,’ he explains. ‘Later on, with brand recognition and valuation, that will change.’

RCG has the depth to grasp long term opportunities, he maintains. ‘We have in-house teams working on product development and are not merely re-sellers.’

House broker and nominated adviser Insinger naturally agrees, seeing pre-tax profits rising to £3.8 million this year on turnover of £8.6 million and accelerating to £11.8 million on £20 million turnover by 2007. Over the same period, the broker sees earnings rising from 3.9p to 12p a share.

Valuation

With RCG shares at 33.5p, more than three times their float price of 10p, Insinger’s earnings forecasts imply a prospective p/e ratio falling from 8.9 to 2.8. Last year, exceptional items played the major part in profits growth, but this is seen as a diminishing factor.

Chu concedes gross margins are likely to narrow from last year’s decidedly fat 71.6 per cent and Insinger predicts 57.3 per cent in 2007. But that is the price of growth, going into new markets and strengthening its presence in existing ones and remains a comfortable prospect.

RCG has not been a generous dividend payer to date, preferring to plough cash back into expansion. This could change, though there is no guarantee, especially if the company taps AIM again.

Chu says his group maintains a ‘flexible approach to fundraising. Both Mr Chan and he are ‘open to be diluted’ if ‘the market is right and people like our story’.

Further expansion, combined with big-name partnerships likely to maintain and enhance RCG’s competitive edge, could warm investors to an issue, especially since it would bring much-needed liquidity to the shares. The company is in the right business at the right time with a sensible strategy and, though clearly speculative, offers the possibility of substantial, long-term growth.