Stocks Discussion

Isetan is a household name and many of us might have shopped there before. I wiill try something out here and analyse Isetan through the lens of their cashflow statements. Operating Cashflows The first thing that strikes me here is that profit is actually negative for them. Just from looking at their cashflows, I believe that this is also due to the impairment on property, plant and equipment of $12m. Thankfully, the company has managed their working capital for this year in such a way that it actually generated more cash for them. Working Capital refers to assets such as inventory, receivables (money owed from others) and payables (money that you owe to others). Investing Cashflows What strikes me here is the high amount that i spent on purchases of financial assets and payments for investments property. These 2 outflows have contributed significantly to the negative cashflows for investing activities. Financing activities Cashflow from financing activities was negative as well, due mainly to dividends being paid out. This would bring us to a dividend payout ratio (dividends/net profit) which is negative, since net profit was negative. Free Cash Flow A quick and dirty estimate of Free Cash Flow brings us to 6.2m. If the company does not hold much debt, then such the free cashflow flows to shareholders of the company.

TL;DR Singpost has fluctuating profitability and cash flows. Although global expansion has contributed to growth, their e-commerce segment needs to be watched more closely. We all know who Singpost is… So I don’t need to mention much here. But other than posting letters, they do also provide courier services and end-to-end eCommerce logistics solutions. They mail 3 million letters a day and have operations all over the world. Not sure if you know this, but there are 743 street posting boxes in Singapore. What can their financials tell us? Revenue is split between postal, logistics and e-commerce. Postal and logistics revenue are about the same, with e-commerce being the smallest. Overall, revenue has increased over the years, due to expansion overseas as well as Singpost not just sticking to delivering mail and parcels. However, profitability have been fluctuating over time, despite revenue increasing steadily. This can be said about the same as cash-flow from operating activities as well. With different strategic initiatives leading to different capital expenditures, free cash flow has also fluctuated. For example, it was 0.3m in FY17, but one year later in FY18, it was 136m. Interest coverage have also reduced over time, which started with a high of 41.6 in 2014, and with the latest FY being 25.2. This shows that the ability for business to pay back interact based on it’s operating cashflows seems to have reduced over time, as seen by how EBITDA has fluctuated over time. What are some risks faced? The logistics playing field is quite competitive, and Singpost may find it harder to expand and grow overseas. Also, value differentiation might be harder between different competitors because I believe they mainly compete on price, convenience and efficiency. This could mean that the main bulk of the business relies on operational capabilities. There could also be further e-commerce losses losses following the acquisitions of Jagged Peak and TradeGlobal. Increased losses here would reduce earnings of Singpost as a hold.

TL;DR The company houses several brand names such as Ajisen Ramen. Despite competitive F&B spaces, the firm has growing revenue and profitability. How does the business make money? Japan Foods Holding Ltd is an F&B group in Singapore specialising in quality and authentic Japanese cuisine. They currently operate a chain of more than 40 restaurants, with some franchise brands and some self-developed. Notable brands include Ajisen Ramen and Menya Musashi (I tried the 5X ramen before which I regretted) They have also venture d into Malaysia and Vietnam to franchise some of their brands. Basically, they are in the F&B restaurant business. What can their financials tell us? Revenue has grown by a Compounded Annual Growth Rate of 4.3% over the years, to 67.8m in 2018. Ajisen Ramen is actually the most popular brand generating the highest revenue of 26.8m, almost 40% of the company’s total revenue, followed by Menya Musashi. The increase in revenue can be attributed to the opening of new outlets of Ajisen Ramen a well as conversions of certain food outlets to one of their other brands. Cashflow from operating activities look healthy and stable, being able to service their cash needs for investing and financing activities, such that the firm is mostly cashflow positive every year. This is a healthy sign since the firm’s core revenue generating activities can sustain the needs of the business. The firm has also become more profitable over time, as shown by Return on Assets and Return on Equity increasing despite increases in both assets and equity. This is an indication that the firm is able to reap returns based on the capital that they possess. Gross Profit Margin and EPS have all improved, reflecting this trend as well. With a Net Cash for Net Debt/Equity, this shows that the firm is well leveraged, and won’t have much interest or debt payment obligations in the future. Four-Pronged Strategy The firm has developed these strategies which include development of new concepts, overseas expansion, cost and quality control and network expansion and consolidation. This to me seems like the right moves to make. Developing new concepts helps to diversify revenue streams, which reduces risk and also introduce fresh concepts to the public. With the limited Singapore market, expanding overseas is also quite necessary to tap on growing middle class bracket in Asia. Network expansion and consolidation might help to reduce costs due to economies of scale too. With high fixed costs like rent and staff costs, increases in revenue will more than proportionately increase profits, so expansion is quite crucial.

Being vested in Haw Par stock is akin to having exposure to 3 key sectors: 1) Healthcare medicinal products (Tiger balm ointment & sister products) 2) Bank (via stakes in UOB, one of the 3 blue-chip local banks) 3) Property (via stakes in UOL, one of the leading property company in SG). The interesting thing about Tiger Balm is that its a age-old household brand name, which carried tons of brand awarness when it comes to pain-relief solutions. The Tiger Balm ointment recipe is also difficult to be replicated by its competitors. Hence, its heartening to know that the company had been effectively exploiting this strategic advantage and carried out product extensions such as mosquito repellent patch, pain-relieving patch etc. They also seek to distribute their products via 3rd party networks & partnerships, reducing/eliminating the need to set up storefronts which result in capital layouts & recurring maintanence expenses. When it comes to their investments holdings in UOB & UOL, they are quite the shrewd investor. Quoted from their 2018 annual report "The Group elected to receive $47.6 million (2017: $25.2 million) of dividend income as scrip shares in lieu of cash dividends during the year. With the higher share base as the Group progressively opted for scrip shares in lieu of cash dividends, coupled with the increase in dividend rate, dividend income from strategic investments increased 64%". So at first instance, it might seem that in 2016 & 2017, their dividend income had shrank. But in reality, they are opting to re-invest and took advantage of lower share prices to hold on to more shares that had consistent dividend growth. Last but not least, not only Haw Par had very low liabilities in total, it also had very limited interest bearing debt, such that its trade & other payables exceed its borrowings. This speak volumes on the conservative & prudent financial approach that the mgmt take. No fancy financial instruments, very straight forward, clean & lean debt profile. All in all, H02 is not really an exciting growth or high yield stock. Its more of a "slow & steady" stock that rewards shareholders over the long horizon, with more gradual upward price movements than sharp downward movements.

I decided to write about this stock even though it might be delistedl, since the store is still a household name which many of us are familair with. The reasons management cited for de-listing was due to weak revenue growth and disruption in the industry. With a strong cash position, there was also no need to raise money through the stock market. TL;DR Challenger has grown quickly over the years with the opening of many new stores. However, e-commerce threatens the business, while a saturated market may stunt growth in Singapore. Challenger’s Business Profile Founded in 1982, Challenger is a Singapore-based IT retailer serving over half a million members across 38 stores island-wide and an online store. Challenger has been awarded Best Consumer Electronic Chain Store for 6 years running since 2013 by HardwareZone Tech Awards voters. What have they done well? I believe Challenger has been quite successful because of the 4Ps of marketing. Price: Challenger’s products are quite affordable, allowing it to draw customers from other consumer electronics stores such as Courts and Harvey Norman. Product: There are a wide range of products of high quality, serving a variety of consumers. Place: The location of Challenger’s stores are quite convenient since they are located strategically across the island. Promotion: Challenger has been growing their marketing strategy, coming up bundles and deals which attract consumers. How might the company fair in the future? Fighting E-Commerce I believe that Challenger probably has to double-up on its battle against the e-commerce giants by better improving their own online shop, as well as improving customer experience. It will be hard for Challenger to fight e-commerce competitors just by price and product diversity alone, since most e-commerce sites have those. Rather, Challenger should seek to improve customer experience by training their staff to be more knowledgeable about products, or by allowing customers to try their products out. In store customer experience is probably crucial as a differentiating factor between e-commerce. Saturated Singapore Market As mentioned in previous posts, the Singapore market is very small, and growth of companies are quite limited. It will be much tougher for Challenger to grow its revenue in the future. Unlike other consumer products like F&B or entertainment, I feel that it is tougher to keep consuming new electronic products. Challenger should consider expanding into the overseas market, as many companies have done and as the government has advised. What can their financial statements tell us? Income Statement Since 2015, revenue has been a downward trend, from 352m in 2015 to 320m in 2018. This decrease in revenue could be due to loss of consumer interest over electronics over time, and could also be attributed to the rise in e-commerce over the past few years which has made this industry more competitive. However, operating expenditures and cost of sales have decreased as well, which has allowed operating income to increase over the years. This is reflected with an Earnings Before Interests and Taxes of 23m. This decrease in expense could be due to lesser marketing expense after Challenger has emerged as a market leader. It could also be due to lower distributions costs once the distribution network is ready. Balance Sheet With a current ratio of almost 3, this shows that Challenger’s short-term liquidity is very strong. This means that Challenger will be able to meet short-term financial obligations well. Challenger does not seem to have much debt at all, as reflected by the fact that debt and interest expense do not appear as a line item on the balance sheet. Cashflow Challenger’s cashflow from its normal operating activities was actually lower than last year. This is reflected by the fact that how trade receivables days have increased over time, which suggests that customers take longer to pay Challenger after they have received their products. Challenger’s inventory turnover days have also increased, which means that Challenger is taking longer to sell its inventory than before. With capital expenditures being only 6% of operating cashflows, this means that the company generates more than enough cash from its normal operating activities to buy new equipment.

TL;DR Kimly seems to be a mature and defensive business but an intense F&B space might threaten its growth. What is Kimly’s Business Profile? Kimly is also another household name, being one of the largest traditional coffee shop operators in Singapore with more than 25 years of experience. In total, they manage a network of 67 food outlets such as food clique, as well as 129 food outlets. Kimly does not actually own the coffeeshop properties, but they lease the space from HDB or landlords as a master lessee. Additionally, they also operate some of the the drinks and food stores. What could happen to Kimly in the future? Mature Business Despite the growth in premium and more niche restaurants in Singapore, I do believe that coffee shop dinning is still a staple of the Singapore food scene. The convenience and affordability of such dinning means that you can frequent such food outlets frequently (which can’t be done for restaurants). In short, customer turnover and customer acquisition cost is much lower for coffee shops than restaurants. Innovation Like other food courts, Kimly has tried to innovate as well by including tray return robots, as well as even conveyor belts. Such innovation should help to facilitate the clearing of tables and allow more customers to dine. In the long run, such moves are probably the right one to make but they need to be refined over time. Competitive F&B Landscape F&B is one of the most competitive spaces in Singapore, due to the many different competitors competing for a market which is not growing in size. Such competition is likely to intensify in the future, with new food chains coming into Singapore. Additionally, the lack of the younger generation who are interested to take over such F&B jobs means that it may be hard to sustain such tenancy in the future. What do their financials tell us? Revenue has increased Year-on-Year since FY2014, reaching a peak of $202m. This shows that there is a demand for such F&B services, and could possibly indicate their Kimly’s offerings allow it to be differentiated from other competitors like Koufu. Revenue seems to be well split between outlet management division and food retail division. This is good to hear since the business isn’t completely reliant on one revenue stream over another. However, gross profit margin has decreased over the years. This could be due to expansions improving profits but decreasing overall profitability. With a current ratio of more than 1.5, short-term liquidity still seems alright. With most of current assets being made up of cash, this should help with meeting their short-term financial obligations. With low levels of debt and strong coverage of interest expenses, debt shouldn’t be an issue that Kimly will face in the future. Cashflow from operations had decreased in FY18, due to a $17.8m increase in receivables. Other than that, cashflow from operations seems to be relatively stable and growing since FY14.

TL;DR Koufu is definitely a brand most of us recognise, and revenue has grown over the past few years due to strategic initiatives. However, the F&B space in Singapore is very competitive. What is their business profile? I don’t think there is much to explain about the business profile of Koufu. They are a household name, and many of us patronise their foodcourts quite frequently (i do!). Other than food courts and coffee shops, they also include tea kiosks, full service and quick service restaurants. What is Koufu’s current focus? Strategic Expansion One of their growth strategies is to grow more outlets, while maintaining current ones. With expansion in Macau already, Koufu can tap on the experience and offerings to reach into different parts of the Chinese market as well. Innovation and Productivity Koufu has been trying to improve innovation within their outlets. For example, they have the smart tray return robots, which sometimes roam around the foodcourts. Such moves are aimed at encouraging diners to return their trays which would potentially free up more space for additional diners to sit. It is also supposed to reduce manpower costs. However, from what I have seen, this strategy doesn’t seem to be working very well. The robots are not in use, and they haven’t been cleared fast enough such that I couldn’t clear my crockery there. How might the business fare in the future? Tough Retail and F&B Market As many of us know, the retail market in Singapore hasn’t been doing too well. This could be caused by the growth of e-commerce, but could also be caused by more malls being introduced over time without population growing. This also means that there is limited potential for the company to grow in the future. Unfortunately, having the bulk of its revenue coming from Singapore doesn’t help either. Food safety and licences Potential lapses could lead to reputation being affected or licenses being revoked. Food contamination and tampering of food at certain stalls can also affect the publicity of Koufu very easily, especially in this digital age. Management of stores may also be more challenging with so many of them to look after. What do the financials tell us? Revenue Revenue has been increasing Year-On-Year since 2015 which peaked at 223m in 2018. This growing revenue is a positive sign, and could be due to the opening of new outlets across the island. Revenue is nicely split between Outlet & mall management business and F&B retail business. However it is the outlet & mall management portion that experienced increases in revenue over the years, whereas F&B portion has been on a decline. Profit Before Tax Profit before tax margins had actually decreased from 2017. This is actually due to falling profitability for the F&B segment. If you actually compare the charts, you will notice that despite revenue for the F&B segment remaining relatively similar, profit before tax has actually been decreasing. Gearing Ratio With a low gearing ratio of only 0.05, this means that the business does not hold much debt. This is positive because it means that the company pays little interest expense. Also, cashflow generated from operations can be used to grow the business rather than pay off your loans. This reduces the credit risk of the company. Debt / Equity Ratio With a D/E ratio of 0.74, this means that the business is funded more than equity rather than by debt. With this number decreasing over time, this suggest the business could be relying less on debt.

TL;DR Revenue and net profit don’t look very rosy for Creative. There is also risk in that most of their revenue comes from the same kinds of products. A competitive environment also doesn’t help. What is Creative’s business? Creative Technology plays on the global stage, but is actually a Singapore born company. With the HQ here, they also have offices in Shanghai and Silicon Valley among others. Most of their products are sound and video consumer electronics which to my personal experience, are quite high quality. They started off with humble beginnings, and the story of how they won Apple in a $100m lawsuit is a good read. Growth Prospects Competitive Market Place With decreasing sales and weak cashflows, I don’t expect the company to do very well in the future. The market is also looking very competitive, with many different players competing with the same market share. As I elucidate below, I don’t think more consumers will buy more consumer electronics over time. Concentration Risk Creative faces this risk because almost all its revenue comes from the same kind of product. This means that in the event of a downturn in this market, Creative will be affected very heavily. Of course the upside is that if the products are very popular, Creative will do very well but this is not the case. This lack of diversification in what Creative sells is also probably why revenue has dropped over time. Diversified Across Regions Thankfully, Creative seems well diversified across the globe, with sales from different regions. This reduces the risk of earnings being too heavily affected if one region does not do well. What do their financials tell us? Income Statement Revenue has actually decreased consistently over the years from FY16 onwards. This is quite a worrying sign. The consumer electronics space have become increasingly competitive with offerings from boutique competitors that offer a wide array of high quality products as well. I believe that smart phones now also provide better ear pieces, so fewer consumers will buy ear phones outside. Despite decreasing revenue, R&D and selling and admin expenses have not decreased with it, which led to decreasing profitability over the years. Even though Net Profit is actually positive, this was actually due to a gain from a litigation settlement with an equipment vendor to recover damages for a wireless broadband project. I believe that this should be seen as a one-off event, such that without this lawsuit, net profit would still be negative, which is quite a bad sign. Balance Sheet With a current ratio of more than 5, Creative’s short-term liquidity is very strong. This means that the company can meet short-term financial obligations very well. In fact, most of the company’s current assets as in Cash. But with this large amount of cash pile, the company should have spent it on other strategic initiatives to grow the business. The company does not seem to hold much debt as well, as seen by how debt and interest expenses don’t even appear on the financial statements. Cashflow Like net profit, cashflow from operating activities was positive due to the law suit. Without this, cashflow here would be negative too, just like the previous year. The way the business operates is working capital (inventory, receivables, payables etc) also doe not generate more cash flow. Cashflow from investing activities seems to be propped up by the sales and purchases of financial assets. There was also lesser purchase of property and equipment, probably reflecting the decrease in orders of the company.

TL;DR Revenue growth has slowed down due to saturated private healthcare industry in Singapore. Growth in China have not reached their earnings potential yet, but such potential could be reached in the future. Business Profile Raffles Medical is quite famous in Singapore, being recognised as one of the premium healthcare services in Singapore. They own and operates a network of family medical clinics, a tertiary care hospital, insurance services and a consumer healthcare division. The clinic was first founded in 1976. But today, they serve more than one million patients today and over 6,500 corporate clients. Financials Income Statement YOY financials look quite similar, with net profit increasing by 3%. This is because YOY revenue and expenditures hardly changed much. Revenue seems to be fairly split between hospital and healthcare services. Over the past few years, revenue have not grown much due to saturation in the Singapore market. This should not be surprising, since Singapore has a small population, and healthcare is not a consumer product which can be consumed repeatedly. (you won’t visit the doctor for nothing) Hence, overall market size revenue for Singapore can’t grow much. Finance expenses did experience a significant proportionate increase YOY due to more debt being taken on. As the firm expands into China, more revenue growth can be expected. Balance Sheet Current ratio is slightly more than 1, which shows that short-term liquidity isn’t very strong. Based on a leverage ratio (Debt/Equity) of 0.14, the business seems properly leveraged, with potential for taking on more debt to fund overseas expansion at a lower cost of debt. The Net Deb/EBITDA ratio is also extremely low, which reinforces the well-leverage position. Interest coverage ratio (EBITDA/finance costs) is also very low at almost 100X. Cashflow Cashflow from operating activities actually improved due to better working capital management. Cashflow from operating activities is driven by high net profit and profitability. Cashflow from investing activities were due to lesser payment for investment properties. However, cashflow used for capital expenditures and investments overseas are almost equal due to cashflow not being strong yet from overseas properties. Cashflow from financing activities experienced both huge inflows and outflows due to new debt being taken on and older debt being repaid. Overall Free Cashflow is actually negative due to huge investment activities overseas. However, these investments should pay-off, such that future free cashflow should be strong. Dividend payout ratio is about 22%. However, due to large expansionary measures and a negative free cashflow, dividends paid out may not be able to be sustained in the long run. Growth Potential China Expansion With greater expansion in China, there could be a strong potential for earnings to rise over the years. China has one of the fastest growing middle-class populations in the world. As such, demand for private health-care has been rising fast. Additionally, the standard of service should be similar to that of Singapore, since the doctors and staff will be trained in Singapore. Stable Core Business With a stable operating cashflow of more than $70m a year, this shows that the firm generates healthy cashflow to run operations. Moreover, their business in Singapore can be considered mature, and should not be disrupted in the near future. I also believe that they are the market leader, and have quite a defensible market position over the rest. Risks Staff costs Staff costs account for close to half of the group's revenue. Shortages in doctors and skilled allied healthcare workers could result in higher staff costs that can put downward pressure on earnings. Training costs for doctors in China could also be higher, especially due to cultural differences that might exist. Economic Conditions A potential economic downturn could affect revenue more significantly since Raffles Medical is considered more of a premium service. Clients may choose to patronise public hospitals or cheaper clinics if Singapore is especially hit with a recession.