Challenger Technologies

[CityFarmer]

A relevant question: Does a weak quarter make a trend?

My answer is NO. The current quarter seemed suffered from the closing down of M'sia operation. Next quarter will also be affected, with the closing of remaining store in Malaysia.

(vested)

[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).

[CityFarmer]

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 concur. I really doubt online store is the main challenge of the company, at least not in Singapore. The online store existed years before the current downward trend.

Base on the recent initiatives from management e.g. sourcing from Shenzhen, and trading subsidiary in Shanghai etc, shows its strategy. Branding is an important step. It will take some time for the branding. The strategy requires little capital, beside working capital and marketing budget, to work.

(vested)

[profeszor]

A relevant question: Does a weak quarter make a trend?

My answer is NO. The current quarter seemed suffered from the closing down of M'sia operation. Next quarter will also be affected, with the closing of remaining store in Malaysia.

(vested)

If, as we have analysed, Malaysia revenue line constitute only about 4% of Challenger's overall revenue, the drop of 15.2% in revenue doesn't seem to correlate with that reasoning? Is there something I might have missed out?

[dydx]

My experience as a long-term investor tells me not to under-estimate the abilities of a competent and driven CEO, and the survivability and the longer term prosperity of the business under his care.

[CityFarmer]

A relevant question: Does a weak quarter make a trend?

My answer is NO. The current quarter seemed suffered from the closing down of M'sia operation. Next quarter will also be affected, with the closing of remaining store in Malaysia.

(vested)

If, as we have analysed, Malaysia revenue line constitute only about 4% of Challenger's overall revenue, the drop of 15.2% in revenue doesn't seem to correlate with that reasoning? Is there something I might have missed out?

There is a common strategy among companies with business in Singapore/Malaysia. The Malaysian revenue is intentionally depressed (legally) and profit is shifted to Singapore, due to tax benefit. Challenger might be having the same tax avoidance strategy

[camelking]

A relevant question: Does a weak quarter make a trend?

My answer is NO. The current quarter seemed suffered from the closing down of M'sia operation. Next quarter will also be affected, with the closing of remaining store in Malaysia.

(vested)

If, as we have analysed, Malaysia revenue line constitute only about 4% of Challenger's overall revenue, the drop of 15.2% in revenue doesn't seem to correlate with that reasoning? Is there something I might have missed out?

There is a common strategy among companies with business in Singapore/Malaysia. The Malaysian revenue is intentionally depressed (legally) and profit is shifted to Singapore, due to tax benefit. Challenger might be having the same tax avoidance strategy

this strategy is called transfer pricing.
it is common throughout the world, not only in this region

Not too sure if malaysian authority would share the same view on legality as you (assuming what u mentioned is factual).

[specuvestor]

My experience as a long-term investor tells me not to under-estimate the abilities of a competent and driven CEO, and the survivability and the longer term prosperity of the business under his care.

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."- Buffett

Your experience is probably on companies that were mismanaged in the first place with ok industry dynamics.

Challenger has already done much better than what I expected since their IPO

PS Nice post Profeszor

I actually agree with all the critiques with Challenger. Problem is you can say the same thing in 2004 when it IPOed and proven right when share price halved. Yet sales and profits did not. Question then is how to determine the turning point.

I have to admit that Challenger did better than what I expected from a big macro point of view ie a slow death with the onslaught of online IT sales as internet booms. I haven't bought a single thing from Challenger in the past 10 years though I frequent SLS. It should have gone the way of Borders. But unlike Borders itself and Popular has remained resilient.

Until their top and bottom line starts to crack, we have to be careful of being too critical to call the top for a more stable IT business vs say Creative or Blackberry, where immediate product launches determine its future. Even Datapulse took a long time for doomsayers to be right even as the outlook for Optical media is pretty clear.

[lanoitar]

Instead of changing their business strategy to find a service or product which they can sell on a higher margin, they instead went head on with the low-margin industry by bringing their own Valore brand to fight with this competition.

Is Valore low margin?

1Q14:
Revenue = $85.407m
Gross Profit = $18.52m
Gross Profit % = 21.7%

1Q13:
Revenue = $100.733m
Gross Profit = $17.133m
Gross Profit % = 17.0%

After accounting for Cost of Goods, the top-line is actually higher than last Q1, despite the much lower revenue.

The main culprit for the lower bottom-line lies in "Rental Expenses" & "Other operating expenses". These 2 entries alone account for more than the full drop in PBT.

Net margin compression is indeed a problem facing Challenger (and many local SME's). Faulting them on the Valore strategy is barking up the wrong tree though.

[kopitescouser]

At least consumer who buy valore powerbank or products, you got a one year warranty which u can exchange for a new one in any challenger should your powerbank spoil or explode. Safer than you buy online or other brand products when you don't even know how to activate their warranty.

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