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Cutting costs on falling YoY revenues should not be sustainable for ValueMax. Though the 3 pawnshops should get a lift when Genting and MBS turnaround. Unfortunately the 3 amigos are still FCF negative.


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Valuemax recent results showed declining revenue but increased profit and margins. But what do you guys think about the increasing trade receivables and debt? Is it normal for a pawnbroking business to have high receivables and debt in general?

Ray
(20-03-2017, 12:26 PM)Rr_1 Wrote: [ -> ]Valuemax recent results showed declining revenue but increased profit and margins. But what do you guys think about the increasing trade receivables and debt? Is it normal for a pawnbroking business to have high receivables and debt in general?

Ray

give you a tip : pawnbroking == gold... 

is gold price good or bad now? Big Grin
Pawn shops provide loans but does not accept deposits. For them to be able to do this, they have to either have plenty of cash, or borrow the cash from another party (bonds and/or bank loans). This is why all pawn operators have high debt. In fact, the higher their debt, the greater their ability to do more business. If there are many people who wish to pawn their gold to you, do you have to cash to lend?

What pawn shops accept in return for a loan is collateral, most of the time being gold. With every loan made as customers pawn their gold (or watch and handbag), customers are obliged to make monthly interest payments over a period of six months, and by the end of the period, repay the entire principal borrowed. So the more customers (or volume of business) a pawn operator has, the higher its receivables should be.

So think of pawn shops as banking services/substitutes.

The increased profit and margin could be a result of lower interest rate on its debt (sibor actually fell, albeit marginally, from Jan to Dec 2016) and/or higher interest charged on its loans. I used to see pawnshops hawking 1%-1.5% interest per month on their loans, I'm not sure if this is still the case? No longer see big advertisement posters outside their shops.

Higher gold price can allow for higher revenues since a collateral of higher value allows for a larger loan. However, I think profitability depends more on how much the pawn operator is paying for its cash vis-a-vis how much it is charging borrowers for it. I.e. it's 'net interest margin.' It was boom time for the pawn operators a few years back due to very high gold price and very low cost of funds. Now gold prices has been stable for the past 2 years and cost of funds is projected to go up. For a pawn operator to grow its profit and/or margins, it has to be able to raise the interest it charges its borrowers. Given the heavy competition, I won't count on the likelihood of this.

Perhaps the only situation where pawn operators will prosper, given the subdued value of collaterals and higher cost of funds, is a recession triggering job losses forcing people to pawn their gold as a means of last resort. I thought the improved FY16Q4 results of most pawn operators is because of this.
(20-03-2017, 06:02 PM)karlmarx Wrote: [ -> ]Pawn shops provide loans but does not accept deposits. For them to be able to do this, they have to either have plenty of cash, or borrow the cash from another party (bonds and/or bank loans). This is why all pawn operators have high debt. In fact, the higher their debt, the greater their ability to do more business. If there are many people who wish to pawn their gold to you, do you have to cash to lend?

What pawn shops accept in return for a loan is collateral, most of the time being gold. With every loan made as customers pawn their gold (or watch and handbag), customers are obliged to make monthly interest payments over a period of six months, and by the end of the period, repay the entire principal borrowed. So the more customers (or volume of business) a pawn operator has, the higher its receivables should be.

So think of pawn shops as banking services/substitutes.

The increased profit and margin could be a result of lower interest rate on its debt (sibor actually fell, albeit marginally, from Jan to Dec 2016) and/or higher interest charged on its loans. I used to see pawnshops hawking 1%-1.5% interest per month on their loans, I'm not sure if this is still the case? No longer see big advertisement posters outside their shops.

Higher gold price can allow for higher revenues since a collateral of higher value allows for a larger loan. However, I think profitability depends more on how much the pawn operator is paying for its cash vis-a-vis how much it is charging borrowers for it. I.e. it's 'net interest margin.' It was boom time for the pawn operators a few years back due to very high gold price and very low cost of funds. Now gold prices has been stable for the past 2 years and cost of funds is projected to go up. For a pawn operator to grow its profit and/or margins, it has to be able to raise the interest it charges its borrowers. Given the heavy competition, I won't count on the likelihood of this.

Perhaps the only situation where pawn operators will prosper, given the subdued value of collaterals and higher cost of funds, is a recession triggering job losses forcing people to pawn their gold as a means of last resort. I thought the improved FY16Q4 results of most pawn operators is because of this.

Very informative, thank you! ūüôŹ
(20-03-2017, 06:02 PM)karlmarx Wrote: [ -> ]Pawn shops provide loans but does not accept deposits. For them to be able to do this, they have to either have plenty of cash, or borrow the cash from another party (bonds and/or bank loans). This is why all pawn operators have high debt. In fact, the higher their debt, the greater their ability to do more business. If there are many people who wish to pawn their gold to you, do you have to cash to lend?

What pawn shops accept in return for a loan is collateral, most of the time being gold. With every loan made as customers pawn their gold (or watch and handbag), customers are obliged to make monthly interest payments over a period of six months, and by the end of the period, repay the entire principal borrowed. So the more customers (or volume of business) a pawn operator has, the higher its receivables should be.

So think of pawn shops as banking services/substitutes.

The increased profit and margin could be a result of lower interest rate on its debt (sibor actually fell, albeit marginally, from Jan to Dec 2016) and/or higher interest charged on its loans. I used to see pawnshops hawking 1%-1.5% interest per month on their loans, I'm not sure if this is still the case? No longer see big advertisement posters outside their shops.

Higher gold price can allow for higher revenues since a collateral of higher value allows for a larger loan. However, I think profitability depends more on how much the pawn operator is paying for its cash vis-a-vis how much it is charging borrowers for it. I.e. it's 'net interest margin.' It was boom time for the pawn operators a few years back due to very high gold price and very low cost of funds. Now gold prices has been stable for the past 2 years and cost of funds is projected to go up. For a pawn operator to grow its profit and/or margins, it has to be able to raise the interest it charges its borrowers. Given the heavy competition, I won't count on the likelihood of this.

Perhaps the only situation where pawn operators will prosper, given the subdued value of collaterals and higher cost of funds, is a recession triggering job losses forcing people to pawn their gold as a means of last resort. I thought the improved FY16Q4 results of most pawn operators is because of this.

Nice short and sweet write-up. My understanding is that they also profit from gold rise when the customers does not redeem and they able to sell the gold at higher than expected margins. Hence revenue dropped by half from 2011 when people were probably able to redeem, but gross profit is higher

Now to see whether it is as recession proof as it was touted to be in 2017/18
(21-03-2017, 07:48 PM)specuvestor Wrote: [ -> ]Nice short and sweet write-up. My understanding is that they also profit from gold rise when the customers does not redeem and they able to sell the gold at higher than expected margins. Hence revenue dropped by half from 2011 when people were probably able to redeem, but gross profit is higher

Now to see whether it is as recession proof as it was touted to be in 2017/18

For that to happen, markets should be correcting itself before the end of 2017 (since markets are forward looking and have remarkable predictive accuracy of recessions 6-12months ahead)
Singaporeans have been undergoing structural unemployment with increasing frequency since the late 1990s. I am not optimistic about the prospect of long-term employment security for locals, and I don't see a reason to believe that this pattern is going to change in the foreseeable future.

Job insecurity, coupled with the two casinos, and cost and lifestyle inflation in Singapore, will continue to put individuals with poor balance sheets into situations of financial distress.

In spite of these factors, I think the long-term prospects of pawn operators are not fantastic. The rising cost of funds will be a problem for bigger borrowers such as moneymax and maxicash. They may have to scale down their borrowing if interest rates rise too much, which means their loan volume will shrink, and hence smaller profits. If they can't borrow, they may raise equity through discounted rights or placements. Maxicash did just this last year.

But the thing that irks me most is that they purchase jewellery and handbags from customers to resell. Selling unredeemed items is fine, but buying more for customers presents inventory obsolescence risk and hoards capital which can be used for loans. It seems to make more sense if they abandon their retailing business and conserve the capital for loans, hence allowing them to reduce much of their debt that is used to hold the purchased jewellery and handbags as inventory. The tiny margins does not seem to be worth the risk. But then again, perhaps the retailing business is an essential part of the loan business; more people in a pawnshop makes one less conscious when pawning an item?

Considering these possible risks, and my ignorance of actual pawnshop operations, all three operators presently offer no margin of safety to me.
Out with the old
Singapore's pawnbrokers are restyling to draw the young and the well-heeled, making bold changes that are right on the money.
SAT, DEC 23, 2017 - 5:50 AM
ANITA GABRIELanitag@sph.com.sg@AnitaGabrielBT

Singapore’s pawn business

DON'T believe the hype. American reality shows such as Pawn Stars or Hardcore Pawn would have you believe that the business of making big bucks from cash-starved individuals hocking their sentimental valuables for quick cash is glamorous, or even, badass. In reality, one of the oldest professions of lending money on the pledge of an engagement ring or family heirloom at the risk of it being forfeited is mostly neither.

In Thailand, parents make the customary trek to pawnshops ahead of every new academic year to raise emergency funds for school uniforms, textbooks and stationery. Queues at state-run pawnshops are a common sight during this time. Similarly, hit by the rising cost of living, low-income earners in Malaysia hard put for cash to buy daily essentials or pay monthly mortgages have kept pawnshops or the vernacular pajak gadai in business for decades.

Therein lies its biggest appeal - pawnshops offer an instant relief facility, within minutes, for those who need money quickly without the hassle of credit checks.

It's no different in Singapore, where the number of pawnbrokers has doubled to over 220 since 2008, when the financial crisis hit, and Asian economies, like the rest of the world, slipped into recession.

Profits for the biggest players are rising, and bold changes to the business model have brought the age-old trade bang up to date.

Around 2008, two new players backed by jewellery chains entered the market in a well-timed move. Pawnshops, hitherto the haunt of the poverty-stricken and the desperate, boomed as a new class of crisis-hit customers came knocking.

The trade hit a peak in 2012. Pawnshop loans shot past S$7 billion, helped in no small part by the rising price of gold which spiked up to US$1,900 per ounce, before tapering off to S$5.5 billion last year.

Almost 10 years after the global financial crisis struck, the big pawnshops continue to thrive. Some have turned to the well-heeled too - the asset-rich but cash-poor ones - to plump up their pledge books, even though the bulk of the business comes from the lower-income in urgent need of cash.

Pawn generation

Singapore may have far too many pawnshops for its population of some 5.6 million. Competition can be brutal and the need to stand out a matter of survival for many.

"Other countries have a bigger population and less pawnbrokers so they deal with more volume," says Singapore Pawnbrokers' Association president Ivan Ho Khiam Seng.

The Singapore Exchange witnessed a pawn rush with the listing of Maxi-Cash, formed by jewellery chain Aspial, in 2012, followed a year later by MoneyMax, founded by the family behind Soo Kee Jewellery and ValueMax. "The listings have injected a lot of life into this trade," says Mr Ho.

Collectively, the three companies have a market value of some S$390 million and in 2016, saw revenue grow to over half a billion Singapore dollars. Valuemax earned S$16 million in fiscal year 2016 versus S$10 million a year ago on the back of S$250 million revenue.

Maxi-Cash's FY2016 net profit nearly tripled to S$11 million in 2016 with revenue of S$163 million, while MoneyMax's net profit doubled to over S$6 million from a year ago on revenue of S$125 million.

Singapore's pawn business

Clearly, the three companies are still riding a profit wave that has set them in good standing so far.

But there are headwinds. "We face the same challenges as all the other retailers - increasing rental cost, tighter human resource supply and higher manpower costs. Volatility in the gold price is of great concern as well," says MoneyMax group chairman Peter Lim.

The industry, governed by the Pawnbrokers Act, is well regulated. Pledges totalled 4.5 million last year, having grown from just above 4 million in 2012. And redemption rates are high at some 95 per cent, according to ValueMax executive director Yeah Lee Ching. In other words, almost all pawners get back their gold cuff links, jewellery, watches, arts, antiques or whatever else they had pledged for a quick financial lifeline.

"Majority of our customers pawn personal articles such as family heirlooms or memento keepsakes... As these are of great sentimental value, they are usually redeemed," says Mr Lim.

Competition has been good for pawners, both in terms of what they get from their pledge, and the interest they pay for the loan. In the "old days", they could raise only half of the value of their collateral but now, with pawnshops having sprung up and scattered across Singapore's heartlands, pawners get 80-90 per cent of the prevailing value of the items hocked.

Sometimes, it's even better. "If (it's) gold, our pawn price is nearly 100 per cent of the value of asset," says Ms Yeah.

The interest rate on pawnbroker loans is capped by law at 1.5 per cent a month - one of the lowest interest rates in the pawnbroking space, according to Mr Ho. It used to be higher at 2-3 per cent in the 1950s and 1960s.

What pawnbrokers in Singapore are charging now is also much lower than the 2 per cent monthly interest rate in Malaysia, an average of 3.5 per cent in Hong Kong, and 4.25 per cent in China. In the UK, depending on the amount pawned, interest rate can go up to 7 per cent monthly.

Customers have Maxi-Cash to thank for the competitive rates. The largest pawnshop in Singapore had much earlier offered one per cent interest on loans for the first month and 1.5 per cent monthly for the rest of the redemption period, which in Singapore is fixed at six months and thereafter open for renewal.

"We found it (Maxi-Cash) a threat and followed suit," recalls Mr Ho.

Cash for gold

Given Asians' penchant for all things gold, a majority of pawned items here are gold items. "Increasingly, customers are bringing in watches, diamonds and precious gemstone jewellery," says Ms Yeah, adding that the majority of ValueMax's customers now hail from the middle-income group and about 60-70 per cent are repeat customers.

"I would say in Singapore, gold makes up about 70-80 per cent of the items pawned," said Voo Seow Fong, director of Lian Foong Pawnshop.

That makes the pawnbroking business here, like pawnshops the world over, susceptible to the vagaries of gold prices.

Nowhere was this clearer than in the UK where pawnshops nearly trebled amid a credit crunch in 2008, when recession led to a gold rush with customers cashing in on the metal. Those days were too good for pawnbrokers such as UK-listed Albemarle & Bond. But then, gold prices slumped in 2013 as the economy improved and forced the major chain into administration.

It's less gloomy now and things are more stabilised, says Mr Ho.

"We still maintain an average of over four million pledges a year for the past few years. It is not stagnant... we envisage a little bit of growth from now on," he says.

Gold's transparent market makes it the preferred choice even for pawnbrokers here - spot prices make it easy for brokers to appraise values. And if the pledge is not redeemed, "we sell it and if no one wants to buy it, I can just melt it down and encash it", says Mr Ho.

On the other hand, diamonds or other gemstones need to be authenticated, graded and if unredeemed, may be harder to sell as "beauty lies in the eye of the beholder", says Steve Lam, managing director of Sembawang Teck Hing Pawnshop.

For that reason, the pledge value can be as low as 30 per cent for diamond jewellery.

"They clean up well"

Over the years, pawnshops have modernised with the dingy making way for a bright and airy setting.

The rise of upscale pawnshops was more than a sheer fad; it was a strategy predicated on wooing a younger clientele as well as the asset-rich, cash-poor milieu.

In place of hard-tiled walls, stores now have softer surfaces; counters are brightly lit and metal grills have made way for transparent glass, symbolically removing the cloak of secrecy and shame that was once commonly associated with the trade.

At its main store in Waterloo Centre, ValueMax even has a private room for high value pawning.

Mr Lam says: "Nowadays, people walk in to our stores without feeling ashamed. Their attitude is: this is their right as they own the valuables they are about to pawn."

Pawnshops have also shrewdly muscled in on the luxury reselling business, retailing second-hand goods from jewellery to luxury handbags to watches, and this appears to be drawing in the younger crowd. For Maxi-Cash, the strategy has paid off handsomely: retail and trading of pre-owned jewellery, watches, branded bags and its line of new gold jewellery "Le Gold" contributed some S$130 million to 2016's topline of S$163 million.

MoneyMax's Mr Lim says the chain now offers over 5,000 "pre-loved" luxury products that include coveted Hermes, Chanel and Louis Vuitton bags, since it introduced the pawn, sell and trade-in services for luxury bags and accessories in April last year.

The move towards retail may not be new altogether. "The sale of pre-owned unredeemed items is an integral part of the pawnbroking business and has been around since the 1980s. The difference is that today the pre-owned goods are reconditioned to look new," adds Ms Yeah.

That spruced-up image has led a younger cohort to warm to the idea of pawning.

Technology is another major enabler. MoneyMax has an online platform as well as a mobile app for buying, selling and appraising valuables.

"The introduction of online services appeal to the tech-savvy younger generation and allows us to reach out to busy customers who may not have time to visit physical stores. Customers can now perform an online valuation of their valuables any time and anywhere, in the comfort of their homes," says Mr Lim. The company is also working on providing cashless payment solutions.

Digital push

While industry players have been swift in reacting to the digital push to grow their business, legislation has not caught up.

"As an industry, we are constantly in contact with social activities and changes, and are more sensitive to that so we keep up with the pace of adapting to new trends. We are using our own initiative to move and adapt," Mr Ho says.

For one, some pawnbrokers allow customers to renew their pledges online and make payments via Giro. Soon, there may be machines akin to automated teller machines which allow customers to transact - for now that's limited to merely renewals - over 24 hours a day.

"We are working on it. Very soon, after office hours, customers can walk by and choose the ATM service and renew and use cash or credit card to pay," says Mr Ho.

Another possible beef is the rigidity of the six-month minimum redemption period that ties the hands of pawnbrokers and exposes them to risk.

Some items are not so highly disposable. "It can be challenging. We keep things for six months and after we forfeit them, we are not sure if we can recover the cost," says Mr Lam.

Ms Voo explains: "We don't take smartphones at the moment as we cannot afford to keep them for six months because they are always changing. For such items, we hope there is a chance of a shorter loan period."

"We would prefer if it were short or more flexible. Let the customer choose. Like in Australia, the redemption period can be one, two, three months or even longer with interest charges based on the tenure of the redemption period. Here, it's rigid," adds Mr Ho.

Will its future be pawned?

Christmas beckons and the festivities - pre and post - are usually when pawnbrokers enjoy brisk business, according to Ms Yeah.

"Jewellery in the past were given as gifts so that when there is hardship, they can be pawned to raise cash. But now it's become less meaningful among the younger generation who don't consider keeping gold a good practice," laments Mr Ho.

That could be a challenge for pawnbrokers, but they don't seem too worried.

"You can't do without a bank anywhere. (Likewise), pawnbroking which is a miniature version. Pawnbroking will still exist... it's a matter of what kind of products pawnshops will accept in future to keep up with the changing lifestyle. So we need to keep fine-tuning," says Ms Voo.

Anything can be pawned. So long as its value can be appraised and there is a channel for its disposal, says Mr Lam, adding: "This is the train of thought that was passed to me from my father."

The majority of pawnshop customers are still the "unbanked" or "underbanked", desperate for cash on the spot. Mr Ho admits just as much: "Our customers are mostly from the low-income group."

"The spirit of our trade is to help anybody who walks in as they definitely have some hardship to overcome. We try to make every transaction successful and let the pawner walk out happily. This is part of our obligation," says Mr Ho, who manages Heng Seng Pawnshop, a family business that has been passed down from his father and has been operating for nearly five decades.

Ms Yeah's perspective is somewhat comforting: "Pawnbroking has a history of over a century in Singapore and is one of the oldest trades in human civilisation. Ten to 20 years from now, the pawn business will continue to thrive."

PAWN STARS THROUGH THE AGES

DEPENDING on which angle of history you choose on the beginnings of pawn, there are two - an Asian and a Western one - with one common denomination: the pursuit of cash.

The word "pawn" stems from the Latin word patinum, meaning cloth or clothing. For the working class, clothes were often the most valuable items they owned.

In the West, pawnbroking existed in the Ancient Greek and Roman Empires as an aid to the poor.

The charging of interest rates was banned by the Catholic church in the Middle Ages, but the reins were eventually loosened in the 14th and 15th centuries in Europe as the need for short-term credit ramped up.

Prominent families such as the Lombards of England and the Medicis of Italy became known as money-lending families.

Famous industry narrations include that of England's King Edward III pledging his jewels to the Lombards in 1388 to help finance war against France, and Spain's Queen Isabella who is said to have put up her jewellery as collateral to fund Christopher Columbus's expeditions to the New World. In ancient China dating back to the fifth century, pawnshops were owned and operated by Buddhist monks. The Chinese Communists slammed the door on pawnshops from 1956-1987, regarding them as usury and a tool of capitalist exploitation of the masses.

The ban was eventually lifted and spawned a thriving business in China which by end-2011, had reportedly grown to be worth some 118 billion yuan.

In Singapore, the existence of the "poor man's banks" date back to the 19th century, brought to our shores by Chinese immigrants from the Hakka community. The earliest mention of the existence of pawnbrokers here was in 1824. The industry continued to flourish in the 20th century and between 1920-1929, reports show that there were 25 pawn shops, all but three owned by the Hakkas.

Over the years, the abacus has been replaced by computers and the clientele has widened from foreign workers, students and housewives to white-collar workers.

The trade comes under the purview of the Registry of Pawnbrokers - an arm of the Ministry of Law.
The 3-month SIBOR has been creeping up since the start of 2017. It will continue to creep up, in line with the Fed's inclination to raise rates gradually. As the cost of funds go up for pawnshops, will their margins be compressed? Apparently not so, as seen from Valuemax's gross profit margin expansion from 16.4% in 3Q2016 to 17.3% in 3Q2017.

The article from BT (shared above) underscores some fundamental drivers of the pawnbroking business:
- Bulk of business driven by low-income demographics, although the asset-rich cash-poor types do use their services as well
- Diversifying into other sources of revenue, e.g. pre-owned jewellery and luxury items, money-lending (use real estate as collateral)
- Using technology as an enabler to optimise the business, e.g. ATMs, Giro arrangements, online appraisals
- This business has existed for a long time, and given the frailties of human nature, will continue to exist for a long time

The market is ascribing a PE of around 8 to 9 times and PB of 0.9 to a well-run business, albeit one in a competitive environment. Is it fair?
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