Challenger Technologies

[weijian]

The recovery for retail IT/electronics continues, although it is still below pre Covid-19 levels. (mainly due to the lack of IT fairs?)

It is also interesting to note that their online business drops with brick-n-mortal recovering. That might reveal abit of the loyalty of a Challenger customer?

Finally, there is a huge 17mil "investment" into financial assets (OTC corporate bonds and listed equities). Granted, Challenger is an asset light business and cash makes up >75% of their equity. It does seem that the Company prefers to hold onto the cash and try its luck at investment, compared to paying them out to shareholders. Does it also debunk its previous argument that it needs substantial cash to fund its inventories/ down payment for its IT fairs etc?

HALF YEAR FINANCIAL STATEMENTS FOR THE FINANCIAL PERIOD ENDED 30 JUNE 2021

The retail sector continues to remain challenging amidst the constantly-evolving and uncertain Covid-19 situation both
locally and globally. To mitigate these challenges, the Group will continue to focus on driving greater productivity, ramping
up e-commerce engagement and enhancing its overall product range.

1H2021 results: https://links.sgx.com/FileOpen/Half-Year...eID=677484

[ghchua]

Finally, there is a huge 17mil "investment" into financial assets (OTC corporate bonds and listed equities). Granted, Challenger is an asset light business and cash makes up >75% of their equity. It does seem that the Company prefers to hold onto the cash and try its luck at investment, compared to paying them out to shareholders. Does it also debunk its previous argument that it needs substantial cash to fund its inventories/ down payment for its IT fairs etc?

I really don't like the idea of listed companies investing their excess cash in financial instruments like bonds and equities. After all, do they have experience in investing? Unless they are an investing holding company with a long term track record like GK Goh, I failed to understand why they are trying their luck in investments.

Most likely, they are being advised by external parties like investment banks etc to do those investments. Even if that is the case, who is going to monitor their performance? What actions need to be taken if those investments underperform?

Questions will need to be directed to the board, especially independent directors on what are the safeguards in place.

[ongweehiang]

Finally, there is a huge 17mil "investment" into financial assets (OTC corporate bonds and listed equities). Granted, Challenger is an asset light business and cash makes up >75% of their equity. It does seem that the Company prefers to hold onto the cash and try its luck at investment, compared to paying them out to shareholders. Does it also debunk its previous argument that it needs substantial cash to fund its inventories/ down payment for its IT fairs etc?

I really don't like the idea of listed companies investing their excess cash in financial instruments like bonds and equities. After all, do they have experience in investing? Unless they are an investing holding company with a long term track record like GK Goh, I failed to understand why they are trying their luck in investments.

Most likely, they are being advised by external parties like investment banks etc to do those investments. Even if that is the case, who is going to monitor their performance? What actions need to be taken if those investments underperform?

Questions will need to be directed to the board, especially independent directors on what are the safeguards in place.

FYI

This is not the first time Challenger is doing this. They have been doing it for a while. 

The first time, they bought some bonds and held it for a while (around 10 years back). I chatted with CFO Tan Wee Ko extensively on that. That investment was more opportunistic. They understood the risk and rewards and took the plunge. They exited at a good profit after a lot of shareholders complained. 

A few years back, the shareholders had been bugging them to do something with the cash. They employed an investment director and did some venture investing through her in the delivery sector and subsequently had to do a write down. The problems with that deal is that the FOMO cause them to go in at pretty high valuation as quite a number of VCs are clamouring to invest in that company. 

Challenger would have garnered some experience from their forays of the past. Maybe we should give them some benefit of the doubt in their investing capabilities. 

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[ghchua]

Hi ongweehiang,

This is not the first time Challenger is doing this. They have been doing it for a while. 

What you have described here seems to be ad hoc opportunistic investments done by them previously, rather than having a dedicated team doing investments all the time, with full-time staff looking after them.

Challenger would have garnered some experience from their forays of the past. Maybe we should give them some benefit of the doubt in their investing capabilities. 

Challenger core business is not in investments. Certainly not from their reportable business segments in the accounts. Which is why I am puzzled that they are doing investment in financial instruments. Ultimately, if they have spare cash in excess of their business requirements, then the logical thing to do is to return them to shareholders and let them make their own capital allocation and investment decisions.

[weijian]

Hi ongweehiang,
Thanks for the history as I haven't looked back into Challenger for that long. But this does reminds me of certain local towkay companies that once invested in DBS high notes about 15 years ago (and then proceed to lose everything in GFC2008). Investing is probabilistic and the outcome does not correlate well with the decision. Making money doesn't mean you made the right decision, nor losing money makes one wrong.

That said, it is not about investing experience nor giving them the benefit of the doubt. It is about tracking the consistency of their words and actions.

Previous VB discussion back in mid 2019 about working capital needs: https://www.valuebuddies.com/thread-97-p...#pid152504

[dreamybear]

The recovery for retail IT/electronics continues, although it is still below pre Covid-19 levels. (mainly due to the lack of IT fairs?)

It is also interesting to note that their online business drops with brick-n-mortal recovering. That might reveal abit of the loyalty of a Challenger customer?

This makes me recall the discussion on this thread (Post 682 / Post 726) a few years ago. 

Despite the popularity of online shopping platforms e.g. Lazada, Shopee, Courts as well as proprietary brand's own websites e.g. Lenovo, Challenger's revenue has been quite stable over the recent years referring to AR2020.  

The discounts provided by online platforms are not insignificant and some vouchers are even stackable ! Given the regular aggressive voucher promotions, one can simply time one's purchases, or even aggregate with other non-IT items and buy from official stores in those platforms.

What I gather from the BT article is somehow Challenger is able to find its niche to cater to customers who prefers to shop and buy from its stores. Since several years ago, I have made it a point to peek into Challenger stores whenever I walk past - I still rarely see customers at the cashier. In this case, we are not talking about non-discretionary items like food where people prefer to choose the fresh produce and buy physically from supermarkets. 

In FY2020, $267m(pg 85) were generated from IT pdt/svc from 43 stores. Factoring in some assumptions like mobile stores assume to be smaller, some may not be operational for the full year(e.g. newly opened), nevertheless, as a rough gauge, each store contributes abt $6.2m per year.

I am curious, amongst other questions :
1. What percentage of revenue(online/brick-n-mortal) are contributed by members / non-members ?
2. For members' purchase, what is the breakdown by age group within the online/offline categories ? What is the membership number ?
3. What is the best selling product/product category for online and offline ? 
4. What percentage of revenue is contributed by inhouse brand ?
5. How much does high value items contribute to its revenue vis-à-vis low value items ?
6. Breakdown of revenue by pdts / svc.
7. Breakdown of revenue by retail / corporate.
8. 5-10 years trends of the above where applicable

Anyone has an inkling ?

I understand one way is for me to take a small stake and send my queries to investor relations(IR). However, generally my experience with companies' IR tells me that I am unlikely to get straight fwd direct replies to my questions, so I think I'd rather save my moolah. I guess the saying "consider oneself as part owner of a company as an investor" cannot be taken literally. Wldn't a person want to know as much as possible abt the company if one has a stake ? I find it daunting as a retail investor to evaluate the potential of a company when we do not have access to the information we require for analysis.

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

Stats - Online retail sales portion of computer and telecom equipment increased comparing Feb 2020 vs Jun 2021 :
https://www.singstat.gov.sg/-/media/file...un2021.pdf
https://www.singstat.gov.sg/-/media/file...eb2020.pdf

Not sure how to read the earlier years' stats coz the format seem to have changed.

[weijian]

Well, after this "Spring-Autumn and Warring States" period, on hindsight we are able to see certain things more clearly now:

- Excluding things like computer/IT peripheries, there is probably still sufficient anxiety from the average consumer that requires an assurance to address it. Challenger seems to be meeting it with its track record, retail experience and after sales support.

- I remember reading TheHourGlass's AR which indicated that majority of watch buyers start their (research) journey online, but complete it at the retail brick and mortar. Would that be similar for the mid/upper tier electronic items?

- Is the shift from offline to online ironically helping to keep retail rental rates in check? (at least it doesn't deviate too much from inflation)

- I think the most interesting comparison would actually be comparing both Circuit City and BestBuy. 1 is already bankrupt, while the other is still striving. What are the mistakes that Circuit City made? And what did BestBuy do correctly?

@dreamybear, you have good questions but most are "proprietary" (at least I think 2/3/6/7 surely are) and will surely help their competitors if revealed publicly. Yes, the "part owner" thing cannot be taken literally - the essence is actually taking a "long term view", rather than "understanding the biz inside out". To compensate for the lack of knowledge of the latter, I would actually focus on observing the actions of the manager/majority owner.

[dreamybear]

Thanks for your reply.

That's probably so. At the same time, I think it's slightly different for luxury items. Visiting a luxury shop is an experience in itself, be it THG, Mercedes car showroom, Louis Vuitton boutique, etc. For high spenders, there may even be a dedicated sales person assigned to maintain the relationship.

Many IT brands have their "official" stores represented at online platforms, so it is safe to purchase even high value IT items from them - there is no difference in buying from physical stores. Additionally, Challenger's shops do not seem to be designed as experience centers like OPPO, Samsung standalone stores. When shopping in Challenger stores, I wld think it is mostly the case of grab and go, or asking the sales person for advice, buy and get out.

Karl did bring out the case of Challenger's competitor Newstead previously.

I do believe WB's outperformance is due to his remarkable knowledge of the businesses he buys. Back in his younger days, he could already talk to a Geico company executive for hours. While we may not know the details, I wld be inclined to believe that despite the age, he already has achieved at least some level of competency in a plethora of areas to at least ask the right questions or to continue the conversation.

[karlmarx]

Its hard to do a post-mortem after so much time has passed. But I think Challenger probably beat Newstead on very basic things like customer service, prices, and management endurance. Competition between two or more businesses is really not so different from competition between two or more (insert your favorite sport) teams.

Part of the reason why I think most consumers like Challenger is because they are not staffed by the likes of SLS salespersons (most of them might be 'extinct' by now though).

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I think the non-F&B retail sales will continue to be impacted by e-commerce if delivery speed improves significantly, so it might be good news if you are a tenant. Or we might see even more F&B and services tenants.

But because the distribution system of goods in Singapore (old school retailing) is already serving the population very well (a mall at every train station or so), I think e-commerce growth here will not be as fast as perhaps our neighbours.

Why wait a few days for your powerbank to arrive by express when you can just get it from a Challenger store after work?

But retailers of generic and non-branded goods will surely face intense pressure from the multitude of generic and non-branded online sellers on e-commerce platforms.

[¯|_(ツ)_/¯]

Challenger@55
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