Challenger Technologies

[ghchua]

ghchua:

Could you elaborate on what you meant:
"unlike last time, when doing a GO, minorities do not need to come out and vote against anything to block a GO. By just not doing anything, minorities are considered as rejecting the offer. "

What I meant was that previously, Dymon/Loo family was using the delisting resolution to try to delist Challenger. With the new rules, they could no longer use the delisting resolution with a low ball offer as offeror and concerted parties cannot vote. Delisting resolution needs to be defeated by minorities coming out in force to vote against it.

However, with a GO, minorities do not need to vote against anything. By just doing nothing, they are deemed to have rejected the offer.

[weijian]

This is akin to Apple changing the rules from "opt out" of Ads, to "opt in" of Ads.

The power of default.

[Shiyi]

ghchua:

Could you elaborate on what you meant:
"unlike last time, when doing a GO, minorities do not need to come out and vote against anything to block a GO. By just not doing anything, minorities are considered as rejecting the offer. "

What I meant was that previously, Dymon/Loo family was using the delisting resolution to try to delist Challenger. With the new rules, they could no longer use the delisting resolution with a low ball offer as offeror and concerted parties cannot vote. Delisting resolution needs to be defeated by minorities coming out in force to vote against it.

However, with a GO, minorities do not need to vote against anything. By just doing nothing, they are deemed to have rejected the offer.

Oh I see. But when offeror launches a VGO, there is no need to hold any meeting. And there's no question of voting.

[ghchua]

Oh I see. But when offeror launches a VGO, there is no need to hold any meeting. And there's no question of voting.

But there is an acceptance level to be met for the VGO in order to compulsory acquire all the shares and delist the company. If all the minorities did nothing and just ignore the VGO, they will not be able to achieve 90% acceptance level and compulsory acquire those remaining shares and delist the company.

[weijian]

It will be interesting to see how much value Private Equity (Dymon Asia) can add. The short message in AR21 by Chairman Loo says that 2 new business lines have started in 2022.

(1) Kingdom: Selling customized PC. A quick search shows that it is focused on selling to gamers who require high performance units. I reckon it could be trying to slowly become a Razer 2.0.

(2) ITEZ.SG: Selling subscription based hardware (Hardware as A Service). Recently I finished reading a book on Salesforce (one of the first SaaS companies) - the Internet was going to give a super tailwind to the SaaS model. But for a HaaS model, I am not too sure. Hardware gets outdated pretty fast (2 year subscription) and is obviously not scalable like software. But there could be some synergies with existing business as prospective customers trade-in their old models (which are then used to rent out) to buy new models, OR they could reduce inventory risk by "renting them out".

AR21: https://links.sgx.com/FileOpen/Challenge...eID=709843

We had incorporated a few subsidiaries under our wholly-owned Challenge Ventures Pte Ltd last year. At the beginning of 2022, two of these subsidiaries turned operational. Kingdom Technologies Pte Ltd, a builder of customised personal computers, sells its products exclusively online under the Kingdom brand name. The second subsidiary is ITEZ.SG Pte Ltd, which is an online platform that offers affordable IT equipment rental on a subscription format.

[BRT]

yeah this hardware as a service thing, i recall reading a headline that apple is also studying the possibility of offering it. maybe challenger is attempting to be a first mover if they're convinced big guns like apple will set a trend. the first thing that came to mind was office supplies e.g. renting of printers/scanners and you pay monthly or quarterly. dont know how well the concept would travel down to consumer electronics, my guess is not so well for the individual product, but if they can bundle with multiple items or with some ecosystem services, maybe.

[dydx]

To me, the 2 most important success factors in Challenger's business are :
1) Smart merchandising - The ability and experience to choose among so many which IT and consumer electronic and related products have real market potential that consumers want to buy. This Founder/CEO Mr Loo has it and is proven over Challenger's track record.
2) Financial prudence including cost consciousness in running a retail stores chain. This Mr Loo also has it and is proven in Challenger's track record.

[dreamybear]

Our valuation of the company’s shares is $1.15. The offer is not even 50% of this......

Pangolin Investment Management

The recent news of Berkshire's HP acquisition made me relook at Challenger (although the 2 companies are not exactly an apple-to-apple comparison). 

Referring to Challenger's AR2021, the ROE is pretty impressive (>15% excl FY2021) but the NPM hovers above mid single digit. (for reference, HP's latest ROE/NPM > 10%)

From an investing viewpoint, can we say that Challenger is well-managed (high ROE) but unfortunately in a difficult line of business (low NPM) ? 

According to the FY2021 results statement : "Retail sales rose by $25.9 million largely due to the easing of restriction and a resumption in economic and business activity across the region, offset by lower online sales and corporate sales of $13.1 million." I think it could be tough for Challenger's online stores to challenge the aggressive online platforms for retail sales. Hence, it seems Challenger's competitive advantage is its strong and trusted brand name attracting customers purchasing in its retail shops physically and it does have a good geographical coverage of Singapore. 

Challenger has a long strong track record and has also implemented business initiatives like developing in-house brand. I am just curious, for the kind of business that Challenger is in, is it exceedingly difficult to raise NPM ? Is the investment merit net cash, high ROE and thus, low NPL may not be that much of a concern ?

------------------------

Warren Buffett’s Berkshire Hathaway reveals major stake in HP, tech stock soars
https://www.cnbc.com/2022/04/07/warren-b...stock.html

HP Key Metrics
https://www.reuters.com/companies/HPQ.N/key-metrics

Challenger AR2021
https://www.challengerasia.com/wp-conten...Y-2021.pdf

Challenger FY2021 FS
https://links.sgx.com/FileOpen/Full-Year...eID=702447

[weijian]

Referring to Challenger's AR2021, the ROE is pretty impressive (>15% excl FY2021) but the NPM hovers above mid single digit. (for reference, HP's latest ROE/NPM > 10%)

From an investing viewpoint, can we say that Challenger is well-managed (high ROE) but unfortunately in a difficult line of business (low NPM) ? 

I do not think that a business with "high ROE is well managed" and a business with "low NPM is in a difficult line of business".

ROEs and NPM really depends on the nature of the business and how it is funded.

For example, restaurant businesses generally have high ROEs as well but they may not necessary be "well managed" like retail branches. The main reason such retail and restaurant businesses have high ROE is because their CAPEX is comparatively low as they do not own the real estate on where they carry out their business. And we haven't even talk about the funding (ie. borrowing increase the ROE without any change in the business fundamentals).

In general, businesses who have their IP or brands, will capture the biggest portion of the value chain (ie. higher margins). All others (distributors and retailers) will share the remaining, and hence small margins. For example, Sheng Shiong before Covid-19, had NPM~7% and is not necessary a "difficult line of business" (although it is not exactly easy as the DairyFarm folks can attest to). The only way for retailers to increase their profit margins is to sell their own house brands. For electronic retailers like Challenger, they do sell peripherals but these are not really high value items to start with. They also have their membership fee progrma and sell insurance/warranty plans to further boast margins.

[Big Toe]

Correct me if I am wrong, Berkshire Hathaway is taking a stake in HP Inc, which printer / Laptop PC side of things. These are products that requires RnD and comes with a constant recurring demand. Especially Printer Ink, which costs very little to manufacture and commands a huge premium. Printers are more or less subsidized. Also a quick look reveals that HP Inc do generate decent returns & no one is rushing into "old tech" space, hence less new competition.

HP Inc and challenger are completely different animals.

Here is some background. Even when contract manufacturers are tasked to produce HP products (venture WAS once HP's contract manufacurer when margins were still decent), the printer head know-how is still kept secret and the contract manufacturer would not be able to produce it without HP's help. Also you have the HP brand and the distribution channels that have been established over many years.

Challenger is just a IT retailer and they did a fantastic job at that. Bear in mind consumers will just go any online store or physical store to get their IT products @ a competitive price. As I did not go into any detail for challenger, I cannot comment how well their house brand(with probably higher margins)/ warranty/servicing etc are doing.

I am not saying that HP is a great investment and challenger is not(investments would require much more research and understanding to come to a decision). But in terms of moat, HP for sure has a wider one.

And comparing Challenger(IT retailer) and Sheng Siong(Supermarket), sheng siong arguably has a much wider moat even though they do not own most of the brands they sell, very much like Challenger. Sheng siong will likely be around for a long time. Challenger, not really that sure...