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Challenger Technologies
27-12-2010, 09:43 PM.
Post: #21
RE: Challenger Technologies
Hi all,

Just came by this board and Iâ€ve already learnt a lot. I just feel that I needed to give something back. Iâ€ve recently done a more in depth analysis for Challenger. I threw some money at it for the great dividend and low price last year and the company did very well by me. Iâ€m currently rebalancing my portfolio and took a harder look at this stock. I also want to take the opportunity to get my value based analysis critiqued by you guys. Just in case I missed anything out.

Here are the results. Cavear Emptor, obviously.

Competitive Advantage Analysis
Challenger is in a very interesting portion of the business. If you consider the retail business, obviously Challenger is just one player in a huge field. However, since Challenger sells mainly IT/Electronics goods, you can consider Challenger to be in the IT retail business and it is a major, if the the dominant, player in that business.

Challenger is a large island-wide chain and it serves as a one-stop shop for everything IT/Electronics related. It is very well known and its stores are in excellent locations. In this regard, Challenger is unique.

I find it difficult to think of a competitor to Challenger. Some may say that Challenger competes against the Sim Lim Square (SLS) as a one stop destination for IT goods. Here is the competitive analysis against SLS:

1) Challenger stores are much more local and more easily accessible than SLS
2) Challenger provides after sales service and has a better reputation for service than SLS
3) SLS is cheaper than Challenger but not by much (5% - 10%)
4) SLS is fragmented and cannot achieve economies of scale achieved by Challenger

Challenger and SLS are two quite different ends of the market. While SLS shops best serve the savvy consumer who go there to buy the bleeding edge goods at lower prices, Challenger serves the general public who donâ€t want to go to SLS or donâ€t know what to do at SLS. The price advantage of SLS disappears when one does not want to travel halfway across the island or when one buys small products.

The most important difference is that you canâ€t really invest in SLS. The closest competitor on the stock market I managed to think of was Harvey Norman (Pertama Holdings). It isnâ€t a very good comparison since Harvey Norman is best known for their white goods and not their IT section. I only used Harvey Norman for a Fundamentals comparison which will be dealt with in the next section.

Fundamentals
Whenever I do funamentals analysis, I always try to find an equivalent stock. In this case I chose Pertama which, once again, is not a very good stock to compare Challenger against. However, its the best I managed. Both are large island-wide chains with interests overseas.

1) PE
Pertama PE: 12.65
Challenger PE: 8.53

A PE below 12 is when I begin looking at a company. Challenger is much cheaper than Pertama but this is a bit of an anomaly. While Pertama PE hovered around 15 (which is a value I consider a good stable and fairly valued company should be at) Challengerâ€s PE plunged due to a large spike in EPS from 2008 to 2009. They havenâ€t released the 2010 Annual Report yet and weâ€ll see how they do.

2) ROE
Pertama ROE: 8.45%
Challenger ROE: 42.06%

This is where we see the divergence in the companies. Challenger is growing at a ridiculous rate. Over the past few years it has averaged at about 30% ROE while Pertama hovers at about 7.5%. Iâ€m really happy that management has managed a >20% ROE even during the crisis. While Challenger is certainly not recession proof, it shows that the chain can weather a recession pretty well.

3) ROA
Pertama ROA: 5.6%
Challenger ROA: 20.5%

I use ROA to determine that the company doesnâ€t have too much liabilities on hand. I find this to be a better gauge than merely looking at long-term debt. If ROA falls off a cliff, it indicates that the company has a large amount of liabilities (current or otherwise) that may be worth a look at. In this scenario, Challengerâ€s return has been reduced by half, so it must have a large amount of liabilities somewhere.

Digging through the balance sheets, we find that Challenger has a large amount of current liabilities which are mainly in the current payables. This looks to be consistent with the previous years and so nothing out of the ordinary. However, it is very impressive that Challenger can consistently generate a ROA of about 20% (it was 10% in 2008). This handily beats most companies Iâ€ve seen, including Pertama.

4) Earnings Growth
Pertama: 35%
Challenger: 108%

I donâ€t really like this ratio since it can provide very skewed numbers. However, Challenger has managed to pull itself up from a difficult year with a bang. Pertama has done so as well, but with numbers that arenâ€t as eye catching.

5) Yield
Pertama: 7%
Challenger: 6%

Pertama is a cash cow. It is fairly stable and distributing a good amount of its cash to the investors. This is one of the main reasons why I donâ€t mind its ROA being so low. Itâ€s not meant to be a growth stock.

Challenger on the other hand is a very interesting stock. Itâ€s ROA is quite high and it still manages to distribute a sizeable dividend. I will take a look at 2010s annual reports once they are out to see whether this type of performance is sustainable. Retail firms donâ€t have a large amount of required capex, but I wonder if the high yield, high growth fundamentals can be maintained.

Management Analysis
Challengerâ€s management been clear about their expansion plans and they have pursued it really well. Challenger is moving into well connected malls in large housing estates to provide the local populace a one-stop location for IT products. They have recently opened a shop in Sembawang and have just secured leases to places in Sengkang and Clementi.

I also personally believe that Singapore is a fairly small market and whatever niche a company finds to sell to, that segment will saturate quickly. Companies must look overseas and Challenger has recently begun to do so. They have recently secured a lease to a location in KLCC which is one of the largest malls in KL.

Management is doing very well and it looks like Challenger is well positioned for the next few years. I believe that the Singapore market will be saturated soon so weâ€ll see how the Malaysian adventure pans out.

Valuation
One of the most difficult parts of this analysis for me is valuation. A stock can be good, but if the whole market knows, then the stock will most likely be priced out of my reach.

Iâ€ve used a simple DCF valuation with a 11% discount rate and a conservative 5% growth rate. Iâ€ve determined that the stock is is fairly valued at $0.55.

Final Summary
Challenger is an excellent stock to own and I purchased a large amount back when it was at $0.38. I may purchase more depending on the 2010 Annual Report.

Points to take note
1) Excellent fundamentals. Making money hand over fist is always good.
2) Overseas expansion. This will be what makes or breaks the company. The initial foray into Malaysia looks profitable, and I will certainly ask management how the Malaysian stores are continuing to perform at the next AGM.
3) Investment for the next 5 years. I think Singapore will be saturated in the next 5 years. So far, Challenger is doing a good job of finding new and heavily traversed locations to set up shop. Once they start opening another shop near existing ones, Iâ€ll start worrying.

I hope this analysis helps, and I would like to hear any comments on the analysis I did. Iâ€m currently looking at a new sector to invest in and any improvements to my value analysis will be much welcomed. Caveat emptor, and may we all make money together!



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27-12-2010, 09:57 PM.
Post: #22
RE: Challenger Technologies
Thank you for taking time to pen out your thoughts on Challenger. A very interesting analysis and I look forward to reading more of your post in this forum.
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Disclaimer: Please feel free to correct any error in my post. I am not liable for anything. Do your own research and analysis. I do NOT give buy or sell calls and stock tips. Buy and sell at your risk. I am not a qualified financial adviser so I do not give any advice. The postings reflects my own personal thoughts which may or may not be accurate.

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27-12-2010, 11:55 PM. (This post was last modified: 28-12-2010, 12:06 AM by pianist.)
Post: #23
RE: Challenger Technologies
my cost-in price for challenger current stands at 0.147 and i have no intention of selling any sooner.
whenever i step into its store..i just feel like at home.. ;p
recently it branched into some online shopping portal called 12buy.sg that sells non-IT goods (I dunno how successful this stream of business is..seems tough biz)
and in its website now - there is an emphasis on the in-thing - "apple shops" btw i just realised apple stock has a crazy gross margin of over 40%..an iphone or ipad seems to be a 'must have' regardless of age-group
The entire Apple product line-up can now be found at 11 Challenger stores island-wide for shopping convenience.
i wonder how different are its apple shops with those from epicentre

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28-12-2010, 02:31 PM.
Post: #24
RE: Challenger Technologies
Hi Vader1671,

Thanks for your thoughts and analysis on Challenger; as well as the comparison with Pertama Holdings. The numbers do indeed look juice for Challenger, but may I suggest you use 8 or 10-year numbers for both companies instead of just year-on-year? This is to smooth out any anomalies due to one-off expenses/income and for recessions/booms. If that time period is not available, then 5 years will also be a good gauge.

I do agree that Challenger has good growth potential and is also generating a lot of cash. Moving forward, I will be monitoring the Company's expansion plans to see how it adapts to the changing landscape for IT products, and how it plans to expand into the region (and not just Singapore + Malaysia).

Hi Pianist,

Interesting - I didn't know Challenger carries the whole line of Apple products (including the iPad?). My impression was that only EpiCentre does this. Not sure if Challenger could be a viable competitor to EpiCentre (which is just focused on Apple products and after-sales service); but then again Apple uses a few distributors and does not appoint a sole distributor, hence margins can be pretty thin for distributors of Apple products [refer to Porter's 5 Forces on Power of Suppliers]. Smile
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28-12-2010, 02:44 PM.
Post: #25
RE: Challenger Technologies
When i want to buy IT product, i usually go Challenger. But if i want to get big and higher price items e.g: ipad, labtop, lcd tv, i did not go Challenger. I went to Courts, Harvey Norman etc.. They are better priced and give lots of freebies too compared to Challenger.

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28-12-2010, 03:07 PM.
Post: #26
RE: Challenger Technologies
(28-12-2010, 02:31 PM)Musicwhiz Wrote: Hi Vader1671,

Thanks for your thoughts and analysis on Challenger; as well as the comparison with Pertama Holdings. The numbers do indeed look juice for Challenger, but may I suggest you use 8 or 10-year numbers for both companies instead of just year-on-year? This is to smooth out any anomalies due to one-off expenses/income and for recessions/booms. If that time period is not available, then 5 years will also be a good gauge.

I do agree that Challenger has good growth potential and is also generating a lot of cash. Moving forward, I will be monitoring the Company's expansion plans to see how it adapts to the changing landscape for IT products, and how it plans to expand into the region (and not just Singapore + Malaysia).

Hi Pianist,

Interesting - I didn't know Challenger carries the whole line of Apple products (including the iPad?). My impression was that only EpiCentre does this. Not sure if Challenger could be a viable competitor to EpiCentre (which is just focused on Apple products and after-sales service); but then again Apple uses a few distributors and does not appoint a sole distributor, hence margins can be pretty thin for distributors of Apple products [refer to Porter's 5 Forces on Power of Suppliers]. Smile

Thanks for the comments. I have taken a look at Challenger's numbers over the past years for my analysis (but did not post it) and ROA has consistently remained about 20% even during the recession. ROE itself has generally been half of ROA which is due to the current payables Challenger holds. I'll think of posting a thorough analysis some time. Perhaps when the 2010 Annual Reports come out.

As for Apple products, the key profit driver for Apple products aren't the Apple products themselves (iPod, iPad, iPhone, iThis, iThat). Those products have their prices controlled by Apple itself and most companies cannot make a large margin off them due to heavy competition and the inability for them to get the products significantly below cost.

What makes the money are the Apple accessories (covers, charges, screens and silly doodads), especially if those accessories are third party and made in China/Taiwan. The margins on those are utterly ridiculous, touching 500% sometimes. If you want to do a check, go online and check out ebay or one of those HK/Taiwan websites. You will see covers selling for $2 online and most places in Singapore sell them for $10 or more.

Challenger has a section dedicated to these products but they do not specialize in them like Epicentre which is more or less consistent with Challenger's business model.


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05-01-2011, 10:57 PM.
Post: #27
RE: Challenger Technologies
Like The Hour Glass (THG), since Jan10 Challenger's share price has also out-performed the STI consistently and by a big margin of some 35% till end-Dec10.....
http://finance.yahoo.com/q/bc?s=573.SI&t...l&c=%5Esti

Total shareholder return including the twice-yearly dividends would be even higher. Quite clearly, Challenger has been a better investment than the average blue-chips listed on SGX.

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05-01-2011, 11:45 PM.
Post: #28
RE: Challenger Technologies
Yes, the net income has been growing quite nicely. One of the issues that I had was that for the last 3 HY, they have been building up a lot of working capital, so the cash flow has not been nearly as nice as the earnings. Inventory has been up 50%, but not sales and gross profits.

My guess is that this comes with opening the new stores: compared to the super-store that they have with Funan Centre, they probably don't (i) have the same economies of scale, or (ii) turn the goods as fast. Then again, by the time the stores do well, and they fix this, the share price goes up too...

Yes with the Apple products, the margins are on the accessories, but you need to sell *lots* of $5 accessories to make up for each $500 machine. And these accessories take up lots of space relative to their value. Something like how a restaurant can't just sell the profitable drinks, they've to sell the food too.

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06-01-2011, 11:18 AM.
Post: #29
RE: Challenger Technologies
redcorolla95 Wrote:Inventory has been up 50%, but not sales and gross profits.

CFO Tan did explain this during the last AGM. IIRC, his explanation was they miss out sales opportunity if they optimize on inventory turn.

That said, I do agree that the new outlets will have an impact on this. Each outlet will need to stock up inventory, and need some time to create enough awareness, before it can turn the inventory efficiently.

redcorolla95 Wrote:Yes with the Apple products, the margins are on the accessories, but you need to sell *lots* of $5 accessories to make up for each $500 machine.

There's a known psychology tendency in humans called the "Contrast Principle". Essentially, it says that after you've spent $888 on a new iPhone, a iPhone case that costs $50 will not look expensive.

I don't recall Apple accessories being as cheap as $5. If it is indeed so, the sellers are shooting themselves in the foot by not following this well-known rule.

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06-01-2011, 04:57 PM.
Post: #30
RE: Challenger Technologies
(06-01-2011, 11:18 AM)bluechipstamp Wrote: I don't recall Apple accessories being as cheap as $5. If it is indeed so, the sellers are shooting themselves in the foot by not following this well-known rule.

Good point. But pirate vendors have nothing to lose by not following this Big Grin


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