Posted on 29 Apr 2019
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TL;DR Gradually decreasing profits despite revenue increasing. The business does bear certain competitive advantages compared to other F&B outlets, but high costs still plague them.
Most of us are familiar with Old Chang Kee, so they probably need little explanation. Their delectable curry puffs, fish balls, and nuggets are delicacies that are quite uniquely Singaporean. Despite being a regular customer, I have finally decided to look into their stocks and financials.
Apart from Old Chang Kee, their outlets such as Take5, Catering, Bun Times and Mushroom cafe. These outlets mainly focus on local dishes as well, and their also quick, cheap and convenient bites. Recently, the group has 89 outlets located in around Singapore.
Strength: (1) Old Chang Kee has a strong brand name among consumers. (2) They also have a competitive advantage over their F&B peers because where they sell delicious snacks at high footfall locations at low prices. (3) Snacks can also be consumed throughout the day, which drives volume that other F&B players probably can't achieve. (4) Innovation with new food items regularly
Weakness: (1) High footfall locations means much higher rent (2) Lack of diversity of food choices (mostly fried and unhealthy for Old Chang Kee)
Opportunities: (1) The company is looking at improving its overseas presence. Their flagship store opened in the UK received quite a lot of positive media attention (2) Management also cited better costs management
Threats: (1) Increase in the number of food chains and brand names in Singapore (2) The promotion and awareness of healthy eating may discourage consumers to purchase their food
Source: Old Chang Kee Annual Report FY18
Over the past few years, revenue has been increasing consistent, which shows that demand for their products is growing. Last year, revenue from retail outlets increased by 9.1% to around $86mn. This increase was due to the opening of new outlets and an increase in revenue from existing outlets.
For Delivery and Catering, there was a 5.3% increase in revenue to $1.3mn. The cost of sales increased along with revenue, but the gross profit margin decreased to 61% due to higher food costs. The margins from other operating expenses such as admin and selling remained the same.
Profit before tax increased due to a revaluation deficit for the factory facilities in Singapore and Malaysia in 2017, which was not experienced in 2018.
Source: Old Chang Kee Annual Report FY18
The current ratio stood at approximately 1.27, but I do believe that the business can pay back their short-term obligations. This is because a lot of their current assets are held in cash.
Currently, the company seems to hold $10.5m in debt. However, I believe the business can pay back their debt well since they hold more cash than debt. Therefore, I won't cover leverage and coverage ratios here.
Source: Old Chang Kee Annual Report FY18
The operating cash flow for the year was $9.6m. This is almost 2 times the size of net profit, because depreciation, which is a non-cash expense, was $5m (almost the same size as profit before tax). Their working capital management had neither generated or consumed cashflow. However, prepayments for certain assets such as for rent or insurance consumes a lot of cash upfront. These figures were roughly similar for the last 2 years.
A lot of cash flow, however, was spent on the purchase of plant, property, and equipment. This figure was $8.5m, which is almost the same size as cash flow from operating activities. This reflects how capital intensive this business is and how much cash is spent on equipment to run operations.
$3.6m of dividends were paid in 2018, which was almost 90% of net profits. I doubt this level of dividends can be sustained. This is because cashflows already seem quite tight, and the company is already looking at debt to finance its operations.
TL;DR: In FY2018, Old Chang Kee saw a revenue increase but with decreasing profitability due to rising costs. However, successful expansion into the UK allows for potential for expansion into more overseas markets, as aligned to their growth strategy for the years ahead.
Started in 1956, Old Chang Kee sells their signature curry puff at their outlets, together with over 30 other food products including fishballs, chicken nuggets and chicken wings. Most of their sales are on a takeaway basis and their outlets are located at strategic locations to reach out to a wide range of consumers.
Old Chang Kee has a 9.12% increase in revenue from FY2017. However, profit before tax decreased by 12.7% due to the increase in not just the cost of goods sold but other expenses like operating expense, depreciation and amortisation, financing costs for their new factory facilities and costs of opening their joint venture in the UK. Isaac has nicely given a run-through of these financials.
Apart from that, we can look at their returns. Their ROA is 7.72%. ROE is 14.21%, which is double of FY2017’s at 6.37%. However, looking at the table below, it was actually due to FY2017’s net profit seeing a great dip that contributed to the increase in returns from FY2017 to FY2018, rather than FY2018 doing well. In fact, FY2018’s net profit actually did worse than in the past financial years from 2014 to 2016.
Under the Old Chang Kee group, the Company has other segments in Singapore, Australia and Malaysia. The Dip ‘n’ Go retail outlet offers delicious food on the go, with a variety of dips to go with. Bun Times retail outlets offer Hainanese inspired buns with a variety of fillings like curry chicken and coconut. The “Curry Times”, “Take 5” and “Mushroom” dine-in retail outlets carry a range of local delights such as laksa, mee siam, nasi lemak and curry chicken. Old Chang Kee Group also provides catering services to the central business district and selected areas in Singapore.
In FY2018, Old Chang Kee opened a new outlet, and currently operating over 80 outlets in Singapore. The enlarged food facilities both in Singapore and Iskandar Malaysia will provide a strong platform to organically grow our local and overseas businesses in the years ahead.
Outside the Southeast Asia region, the Group opened its first flagship outlet in Covent Garden - London, the United Kingdom in June 2018, receiving positive media reviews from both the United Kingdom and Singapore. It has generated new revenue streams for the Group and uplifted Old Chang Kee’s brand positioning. The Group is encouraged by the London outlet’s initial success and will continue to work hard to maintain positive momentum.
Like other food and beverage companies, Old Chang Kee faces strong competition as it is arguably substitutable with products from other brands such as Polar, Bengawan Solo, Tip Top, etc. However, these other players have been around for a long time, and I suppose that they have been co-existing in the same playing field all this while.
Partnering with other food delivery companies like Deliveroo and FoodPanda gives them a potential increase in sales, especially as increasing customers utilise such platforms.
Old Chang Kee @ Jewel Changi Airport
Old Chang Kee also opened an outlet at Jewel Changi Airport. Passing by the shop, I noticed that they have a wider variety of food products with new items that are not available at other outlets – which are what they called their Flavours of the World themed puffs. This includes the Mala Chicken Puff, HK BBQ Puff, Teriyaki Puff and Chilli Crab Puff, encompassing tastes from different countries around the region. This can be a way to test the receptiveness of these products with customers from all over the world passing through Jewel and ultimately help in deciding their expansion strategy outside Singapore.
Their net profit showed that they may not be doing very well in the past few years. Despite an increase in revenue, their costs have been increasing even more, causing the net profit to decline. FY2017 was a year of poor performance for Old Chang Kee, but we can see that they experienced a rebound in FY2018. However as we know, past performance does not guarantee future performance.
Considering that they have the intention of expanding overseas, there is a good potential for growth, giving them customers from outside Singapore and Southeast Asia. Seeing how successful they are with their outlet in London, it is evident that Old Chang Kee’s signature products are not just enjoyed by people here in Singapore, but also cater to the tastes of those further from home. Should Old Chang Kee expand overseas, especially countries in the West, they will be able to enjoy having an edge in the market, especially since such Singaporean delicacies are not commonly found yet greatly enjoyed by the people there, and such unsaturated markets will give much higher room for revenue and brand growth.
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