Challenger Technologies

[profeszor]

I believe that earlier in the thread the buddies have discussed quite intensively on the issue between the trend of the cheaper Online Retailers / Cheaper Retailers(e.g simlim) and challenger.

My take is that Challenger is/will still remain as the main IT Solution for the mainstream market in singapore . At the end of the day , if one were to shop in sim lim he/she will probably has to have some level of IT literacy to prevent oneself from getting scammed , as for the cheaper online alternatives , they seem to be targeting at a different segment of the market where the purchaser is usually IT savvy and is comfortable in making online purchases because there are still people whom are skeptical with such practice as it does not allow them to have a actual feel of the product , ensuring its authenticity etc.

On the Branding side , Challenger seemed rather aggressive on marketing their house brand valore ( prob because of the high profit margins on such products and to spur growth). What i don't feel comfortable/understand is why are they opening so many different types stores (Valore Stores/ Musica Stores) even when the shopping mall has a Challenger branch itself where it houses the very same products. Wouldn't this lead to excessive supply / attain a state of self cannibalism for the company or even if those were not the case and every else remains status quo , an increase in operational overheads will ultimately be inevitable.

Lastly, the recent case of the Valore power banks allegedly catching fire seemed to have dealt a rather big blow to the company which has be investing rather intensively on building the brand.

And if one were to compare between Challenger and its closest competitors (Courts/ Pertama(delisted)) it would be pretty clear on who is the winner in terms of their fundamentals.

On the valuations end, assuming earnings remains bleak at 0.96 per quarter for the rest of the year will put challenger at a pe of 14 for the current market price of 0.54. I shall leave it to the buddies here to form their own analysis of whether paying a pe of 14 for the company is a fair deal since everyone has their own intrinsic value / MOS.

However given a choice between courts and challenger i would still take the latter since i m investing in a retailer and not a retailer which behaves like a bank.

(Vested)

I agree with your point that Challenger is here to stay as the main IT solution for the mainstream marketing (with their good membership campaign) in SG. What I'm contending is that whether or not they are the leaders in their field, they are currently in a rather bad situation due to the nature of business. In fact, if even by being the dominant player in the market this is the best they can do, we can expect some problems in the interim.

As with all businesses there are two very fundamental desiderata to overcome: (1) how do improve revenue? and (2) how to improve profit? At the beginning of their aggressive marketing campaign to push for the new brands, they solved the part of revenue -- by reducing their margins (a boon for consumers, but not so to investors). But on the account that revenue lines has been exhausted, it does not justify that they should continue to eat into their margins more since it ultimately sucks profitability off the business. And as I've mentioned, most of the accessories bought are one-time purchases (I have not met a person who buys a power bank every year/2 years) and do not supply an adequate customer base for revenue growth. Hence with a revenue stream that is in my expectation to remain flat, and with no strategy to improve margins, the company is experiencing a stalemate.
(also, just a personal observation, they have some very weird products like a 1200mAh power bank with torch light function.. really?)

I don't understand how they are planning to use their rather impressive member base to turn about the sliding margins. I suspect that they initially offered huge discount to entice people to join their membership deals -- but what's next? Repeat customers on a low profit margin? There's only a limited number of people in Singapore; and that already seem to reached its peak.

On the topic of Courts, it is also the case they are facing a similar predicament in this retail industry, citing staff, depreciation, rental etc. as their primary costs (though with furniture to showcase their rental costs is significantly higher). But it is not the case that we are choosing a dichotomy between Courts or Challenger -- we don't always have to compare a business with its competitor to see "if it is a good company". Comparisons only give you a subjective conclusion of the company in question. An objective, logical view of the events will lead us to conclude that the sector currently is not doing well, due to the challenges (no pun intended) faced as mentioned above.

Personally I think the management is a very capable bunch of people, and that's perhaps the only deterrent to shorting the stock. Nonetheless, the financials are good, the ROE is terrific, and basically all the notions of 'a safe company' is imbued into the balance sheet of Challenger -- but it just lacks this very important element of growth (for now).