Challenger Technologies

[kopitescouser]

I guess I shouldn't say much since I want to buy in

[profeszor]

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.

I must apologise for not being clear when I talk about 'low margins'. I realised, upon re-reading what I've written, I am liable to be misconstrued as saying that "Valore has a lower gross margin than their more conventional business". But I am not referring to that comparison when I wrote that.. I was actually thinking of those online retailers which has an excess of 50% in GPM. As I've mentioned, for an established customer-facing business like Challenger, it costs them a lot more to fight with the online retailers. (this argument however is not strong, for most people who still patronise Valore for their accessories)

Hence I used NPM to reflect the 'true' margin for two reasons:

(1) The venture in Valore takes up a lot of space in their shops (esp. in their newer establishments) where they showcase the very numerous models in a Apple-store fashion, costing them more rental costs. It can be argued that the rental cost is a natural result of real estate appreciation in Singapore -- a double whammy in my opinion.

(2) With a lot more models and stuff to sell, they naturally need a lot of employees to cover the increased traffic, and in a logical sense (not accounting sense) I think it is fair to weigh in such costs as part of the "cost of business". The employee costs increased by ~$600,000, which is similar to the increase in "Other operational expenses" of the income statement. Again, it can be argued that it is a systematic problem resulting from higher cost of employing staff. As I've never worked before at Challenger, I do not know if there is a salary-increase from 2013 to 2014 across the board which costs them the extra $600,000. But as such entry-level job goes, my assumption is that the salary they have given for their employees should remain about flat, and the costs generally comes more employing more people to sell the huge range of products they have in their stores. And this problem comes directly from their Valore strategy.

You might be right in saying I'm barking up the wrong tree, for my approach is a little more polemical.

Edit: on the upside, now that Challenger's price has took a rather drastic turn, seems like a good time to scoop it up for those who think it's a good firm.

[CityFarmer]

Is Valore low margin?

You is right. The management has confirmed that Valore's margin is higher than other products' during the last AGM.

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.

Rental has been the most challenging expense, as acknowledged by the management last AGM

[ValueMaster]

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.

Sent from my iPhone using Tapatalk

Ya that's very true. I once bought from online before and after a few months it was spoiled.. got very angry since I couldn't get a refund.

Challenger gives the typical aunty or uncle a peace of mind
1) that the warranty will be honored
2) and they will not be chopped carrot (hate those sim lim square ah bengs)

[ValueMaster]

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

Net profit margin seems to be on a down trend
but

revenues and net profits have been on a up trend over the last 10 years

This quarter is really very weak, but investors should be patient and wait for the full 2014 results to see if the Valore move makes sense or not

[InvestArk]

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 ( probably 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 already 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 everything 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)

Any alternate views from the buddies here regarding the above highlighted point?? Does anyone think they are over extending here? I was at their clementi mall store the other day and noticed that they had a valore store operating just below their main store which houses the very same products one could get in their main store. Similarly for their branches in west gate/jem @ jurong east.

(Vested)

[ValueMaster]

I think challenger could be a bit too aggressive or optimistic
In the jurong east area alone they have stores in westgate/jem/jcube/imm I think

[Ferns]

In Funan, they have challengers on almost every floor even though there's a huge one right at the top floor. I was quite puzzled by that...

[ValueMaster]

How is it that challenger managed to grow revenues earnings every year for the past 5 years?

[CityFarmer]

Any alternate views from the buddies here regarding the above highlighted point?? Does anyone think they are over extending here? I was at their clementi mall store the other day and noticed that they had a valore store operating just below their main store which houses the very same products one could get in their main store. Similarly for their branches in west gate/jem @ jurong east.

(Vested)

The Valore branding needs dedicated stores. The same as Popular need Borders for different retail concept. I am OK for the company to operate Challenger and Valore separately.