Aspial

[money]

no need to thank me. I have been tricked by its non-core pawn business too. For the market cap, it is only when I read the newspaper that I realise it is $88m.

Pawnbroking is not that good a biz model, of the $108.5 loaned out they recognise the $8.50 as the revenue which causes a higher profit margin. If you were to base on ROE, their returns are much lower than that of our 3 local banks. Another factor is that their profit margin is capped by the Pawnbroking act which states a maximum interest rate of 1.5%

The prospectus has just been released today which means that retail investors will only have 7 days to digest the information, isn't it a bit too rush?

haha dont have to worry about most retail investors, they will just go IPO with their eyes closed.. or they would look around and say, "there are more of these maxi shops around, it even has michelle chia as the ambassador or what you call it, then they would say sure profitable one".

Remember a few years ago, mary chia had an interesting story to share too, its share price is probably languishing below 10 cents today (its all time high was 40 cents).. Many retail investors dont learn from their lessons

[greengiraffe]

Just monitor how the KOH brothers and the entire family play their own stocks - truth is they have always been buying their shares - even at current prices - Global premium hotel and even Aspial.

We may not agree with what is the fair valuations of these companies and since we have a choice for our own investments, it is worth noting how some companies have inflated valuations.

[camelking]

Just monitor how the KOH brothers and the entire family play their own stocks - truth is they have always been buying their shares - even at current prices - Global premium hotel and even Aspial.

We may not agree with what is the fair valuations of these companies and since we have a choice for our own investments, it is worth noting how some companies have inflated valuations.

[CityFarmer]

no need to thank me. I have been tricked by its non-core pawn business too. For the market cap, it is only when I read the newspaper that I realise it is $88m.

Pawnbroking is not that good a biz model, of the $108.5 loaned out they recognise the $8.50 as the revenue which causes a higher profit margin. If you were to base on ROE, their returns are much lower than that of our 3 local banks. Another factor is that their profit margin is capped by the Pawnbroking act which states a maximum interest rate of 1.5%

The prospectus has just been released today which means that retail investors will only have 7 days to digest the information, isn't it a bit too rush?

I had a quite different view on pawn biz. Let me share my view in detail.

We are aligned on the biz model, probably not aligned on the profitability of the model. Pawnshop gave secured collateral micro-loan, with interest as income (at the moment 1% per month) and typical 6 months period. If not redeem, will goes to public auction. If should not be a problem to recover the loan.

Profitability wise. Maxi-Cash cost of capital is around 2.4%-3.3% pa (bank and other source) and 3.5% pa (overdraft facility). Interest charged is 6% per 6 months, compounded 12.4% pa. The gross profit margin is 8.9%-10%. This margin is much better than bank secured loan income.

Extra income from 2nd hand items will bring in another few %.

Probably too much number to digest, let's apply common senses to validate

Common sense #1: Credit card and overdraft biz are consider profitable biz to financial institutes. Credit card interest is 24% pa with unsecured credit (loan), bank overdraft with interest 10-15% with (un)secured credit. Pawnshop micro-loan is 12%-18% pa should be comparable.

Common sense #2: Pawnshop number increases with average of more than 10% in the last 3 years. Rationally only profitable biz attracts new participants.

Common sense #3: Pawnshop pledged loan amount increases by 80% from 2010 to 2011. (from 2.7 Bils to 4.9 Bil). It is a highly demanded service. Redeem rate (with interest) is more than 96% in 2011, so it is quite a low-risk biz.

[shanrui_91]

I had a quite different view on pawn biz. Let me share my view in detail.

We are aligned on the biz model, probably not aligned on the profitability of the model. Pawnshop gave secured collateral micro-loan, with interest as income (at the moment 1% per month) and typical 6 months period. If not redeem, will goes to public auction. If should not be a problem to recover the loan.

Profitability wise. Maxi-Cash cost of capital is around 2.4%-3.3% pa (bank and other source) and 3.5% pa (overdraft facility). Interest charged is 6% per 6 months, compounded 12.4% pa. The gross profit margin is 8.9%-10%. This margin is much better than bank secured loan income.

Extra income from 2nd hand items will bring in another few %.

Probably too much number to digest, let's apply common senses to validate

Common sense #1: Credit card and overdraft biz are consider profitable biz to financial institutes. Credit card interest is 24% pa with unsecured credit (loan), bank overdraft with interest 10-15% with (un)secured credit. Pawnshop micro-loan is 12%-18% pa should be comparable.

Common sense #2: Pawnshop number increases with average of more than 10% in the last 3 years. Rationally only profitable biz attracts new participants.

Common sense #3: Pawnshop pledged loan amount increases by 80% from 2010 to 2011. (from 2.7 Bils to 4.9 Bil). It is a highly demanded service. Redeem rate (with interest) is more than 96% in 2011, so it is quite a low-risk biz.

Under the traditional loan biz, company will loan out their cash in return for interest rate. Hence, how much loan a company can make is dependent on its asset size which is why P/B is a more important ratio than PE(not talking about the non-interest income).

Another very important ratio will be ROA and ROE which will determine the amount of profit that the company can make with its current asset size.

Using PBT/Total Asset, 1466/128649 = 1.14% which is its ROA. Comparing with our 3 major banks, it is on par with them. However, our banks are still more profitable than the Maxi-cash.

The reason lies in the fact that our banks can easily geared up with their asset/equity ratio being more than 10 which allows them to enjoy a double digit ROE. On the other hand, Maxi-cash can hardly gear up to that level as its current asset/equity is only 3.5 which makes its ROE ~4% for the pawning business. 95% of Maxi-cash asset belongs to the pawning business.

Is Maxi-cash allowed to gear up further like our banks? Unfortunately no as our banks operate on the basis on fractional reserve banking. Banks can do so because they have a very secured deposit base from equity, repo and savers paying them very low interest rate as we all know.

For Maxi-Cash, they have to borrow from banks which will not only charge them a higher interest rate but also restrict the amount of money they can borrow. The only way out is for them to issue debt and equity to increase their loan portfolio.

One last issue with maxi-cash is that their ROA is being capped as a result of the Pawnbroker act which allows a maximum interest rate of 1.5% to be charged per month. Maxi-cash is already operating near this level as they are charing 8.5% for 6 months loan. The only way for them to increase their ROA is to lower cost or to fully loan out their asset. To increase profit, they have to increase their asset size which is what this spin off is intended for.

Not forgetting that loan's interest rate is at its historical low at the current level. When the global economy recovers and interest rate starts to rise, their cost of capital will increase and hence reduce their profit margin and ROA.

Pawn broking is a relatively safe business especially in Singapore. However, due to restriction of their interest rate as well as inability to gear up as much, they lose out to our banks.

They could also get into the red if they expand too fast and interest rate starts to creep up when the economy recover. The only economy of scale that they get to enjoy is a lower interest rate and lower fixed cost of advertising as compared to other pawn shops.

[CityFarmer]

Under the traditional loan biz, company will loan out their cash in return for interest rate. Hence, how much loan a company can make is dependent on its asset size which is why P/B is a more important ratio than PE(not talking about the non-interest income).

Another very important ratio will be ROA and ROE which will determine the amount of profit that the company can make with its current asset size.

Using PBT/Total Asset, 1466/128649 = 1.14% which is its ROA. Comparing with our 3 major banks, it is on par with them. However, our banks are still more profitable than the Maxi-cash.

The reason lies in the fact that our banks can easily geared up with their asset/equity ratio being more than 10 which allows them to enjoy a double digit ROE. On the other hand, Maxi-cash can hardly gear up to that level as its current asset/equity is only 3.5 which makes its ROE ~4% for the pawning business. 95% of Maxi-cash asset belongs to the pawning business.

Is Maxi-cash allowed to gear up further like our banks? Unfortunately no as our banks operate on the basis on fractional reserve banking. Banks can do so because they have a very secured deposit base from equity, repo and savers paying them very low interest rate as we all know.

For Maxi-Cash, they have to borrow from banks which will not only charge them a higher interest rate but also restrict the amount of money they can borrow. The only way out is for them to issue debt and equity to increase their loan portfolio.

Shanrui_91 had forced me back on Maxi-Cash research. It is ok, probably i can learn from the discussion.

First of all, may i say that if sufficient fund acquired, the biz model is profitable? The issue now is how can Maxi-Cash secured fund to expand, an operating issue.

Pre-listing, Maxi-Cash got their fund from Aspial via direct funding or guarantee fund. Refer to page 41, total secured fund is 153.9 Mils, used 117.9 Mils, 77% used, still have 27% under utilized.

Post-listing, as commented, Maxi-Cash beside Aspial support, it can also raise fund via bond/right as other listing companies. I will not mind Maxi-Cash doing it, since it will be used to generate more value to shareholder. Bank do the same with various preferential share scheme.

So may i conclude Maxi-Cash should be no problem to secure sufficient fund? This is in fact an edge of Maxi-Cash over other pawnshops.

One last issue with maxi-cash is that their ROA is being capped as a result of the Pawnbroker act which allows a maximum interest rate of 1.5% to be charged per month. Maxi-cash is already operating near this level as they are charing 8.5% for 6 months loan. The only way for them to increase their ROA is to lower cost or to fully loan out their asset. To increase profit, they have to increase their asset size which is what this spin off is intended for.

8.5% per 6 months secured loan interest and sustainable is very good biz model. Isn't it? I agreed with you, to get spin-off is favorable to Maxi-Cash, an edge over other pawnshop.

Not forgetting that loan's interest rate is at its historical low at the current level. When the global economy recovers and interest rate starts to rise, their cost of capital will increase and hence reduce their profit margin and ROA.

Pawn broking is a relatively safe business especially in Singapore. However, due to restriction of their interest rate as well as inability to gear up as much, they lose out to our banks.

They could also get into the red if they expand too fast and interest rate starts to creep up when the economy recover. The only economy of scale that they get to enjoy is a lower interest rate and lower fixed cost of advertising as compared to other pawn shops.

It is difficult to debate with an imaginary environment. I would like to use common sense approach instead

Credit card biz with maximum unsecured 24% pa interest rate survive under n cycle of high capital cost? Bank's overdraft facilities also survive with its 10-15% pa interest rate. Will pawnshop survive with its maximum (1.5%*12) 18% pa secured interest rate? I seriously think so.

[freedom]

credit card debt, if I am not wrong, is securitized by banks for cash. Otherwise, credit card will not be a good investment for banks.

[shanrui_91]

Maybe we should transfer all the posts related to Maxi-Cash to its own thread instead of Aspial.

I welcome the exchange of idea with you, this is what the forum is essentially for in the first place.

you are right that by listing, their profitability will be raised based on their ability to gear up using this $20m of interest-free cash. They are likely to be able to get further loan of $40m to boost their total asset based on their asset to equity ratio. This $60m boost in asset will be able to generate extra $600k in net profit assuming that they maintain their ROA.

While they enjoy a 8.5% interest revenue for 6 months which works out to be 17% interest revenue pa, the truth is that staff cost, rental cost and interest cost wipe out a huge percentage of their revenue. With their 10% profit margin, the 17% interest revenue becomes 1.7% profit. This means that for every $100 they lend out in a year, they earn $17 in revenue and $1.70 in profit. Earning $1.70 in profit out of $100 lent out is not that exciting unless they can have very high turnover (which is limited by their total asset).

Securitization is a reason why the US banks are profitable and which partially leads to the 2008 GFC. The banks take on a $100 loan from customer's purchase in exchange for 1% in interest income. However, they can transfer these debt to companies like Fannie and Freddie by paying them maybe 0.8% interest. In this way, the bank earns a 0.2% interest but they are not liable for any default and now they have another $100 to lend out to another person and the cycle continues. Perhaps, Maxi-cash might choose to use their trade receivables as collateral next time round to increase their turnover.

They will never be able to gear up to a level where they are able to enjoy double digit ROE unless their ROA doubles or triple. And neither should investor be happy that the company may be raising further debt or equity as their current ROE is pretty low at 4%.

The most positive things that can happen to Maxi-cash is that they are able to reduce their cost though I believe that they will not be enjoying much economies of scale. What's more since they are trading at a 50% premium to NTA post-listing, much of the future growth coming from expansion of book value and ROA will have been factored in.

[CityFarmer]

Maybe we should transfer all the posts related to Maxi-Cash to its own thread instead of Aspial.

I welcome the exchange of idea with you, this is what the forum is essentially for in the first place.

Till the day when Maxi-Cash formally out from Aspial, it is still appropriate to discuss it here Anyway, i will let admin to decide.

I would like to say, i enjoy the discussion so far. It forces me to review my previous thought.

My definition (did i say it is 2nd nature of engineer ), profitable means ROA/ROE > 10%

Let's continue. Instead of embedded your comment here, i would like to summaries the key points of your view.
- Pawnshop biz model profitability rely critically on the benefit of economic of scale, similarly as bank biz which you refer as example
- The present ROA/ROE of Maxi-Cash shows the in-ability to be profitable. The current ROA/ROE will be prohibited for investor to inject more fund, thus restricted Maxi-Cash to expand further to achieve the economic of scale

I had to admit that you are hitting on the softest part of my view on Maxi-Cash profitability.

I will address the ROA (ROE) point first. The current ROA of Maxi-Cash is 1.8% and ROE is 6.4%. The next logical question to ask, is the current ROA/ROE is restricted by its biz model with present asset/equity holding? or is the current ROA/ROE is restricted by its current state of under-utilized asset/equity holding? I will think it is likely due to the latter.

I do believe Maxi-Cash biz model should be able to achieve better ROA/ROE even with present asset/equity holding. The expense ratio is 90% of revenue for pawnbroking biz. It may due to Maxi-Cash is expanding fast, a heavy under-utilization of their pawnshops and human resources. Extra start-up expense occur which can be one-time.

There are still 27% of loan facilities yet to be utilized, and extra fund injected from IPO, before new fund raising needed.

So you may ask my view on optimum ROA/ROE. The bank expense ratio (base on net margin) is 60%. Maxi-Cash had edge in interest rate charged, 17% pa vs bank interest income ~2% pa, but Maxi-Cash loses out on bank non-interest revenue. After adjustment, i will estimate the expense ratio to 80%. Assuming all others remain, the net profit become ~5 mils, ROE is ~11% and ROA is 3-4%

Let move on to your 1st point of your view. I fully agreed the profitability of Maxi-Cash rely (critically) on the benefit of economic of scale. But with a footnote that it may not required the similar size as bank before it is profitable.

Having said all above, since there are estimations and assumptions instead of hard facts. IMO, with the PE of 25 and PB 1.5, probably not a wise move to participate.

[CityFarmer]

Extra information to indicate the under-utilization of Maxi-Cash pawnshops

Base on Yearbook of Statistics Singapore, and Public Trustee’s Office website (www.ipto.gov.sg)

2011: Amount of Loans given out is 4946.8 Mils, with 175 pawnshops/pawnbrokers
average loan amount per pawnshop = 28.3 Mils / pawnshop

Maxi-Cash's amount of loan given out is 122.5 Mils with 24 pawnshops/pawnbrokers
average loan amount per pawnshop = 5.1 Mils / pawnshop

Maxi-Cash is at 18% of its capacity base on industrial average.