Aspial

[CityFarmer]

Under the traditional loan biz, company will loan out their cash in return for interest rate. Hence, how much loan a company can make is dependent on its asset size which is why P/B is a more important ratio than PE(not talking about the non-interest income).

Another very important ratio will be ROA and ROE which will determine the amount of profit that the company can make with its current asset size.

Using PBT/Total Asset, 1466/128649 = 1.14% which is its ROA. Comparing with our 3 major banks, it is on par with them. However, our banks are still more profitable than the Maxi-cash.

The reason lies in the fact that our banks can easily geared up with their asset/equity ratio being more than 10 which allows them to enjoy a double digit ROE. On the other hand, Maxi-cash can hardly gear up to that level as its current asset/equity is only 3.5 which makes its ROE ~4% for the pawning business. 95% of Maxi-cash asset belongs to the pawning business.

Is Maxi-cash allowed to gear up further like our banks? Unfortunately no as our banks operate on the basis on fractional reserve banking. Banks can do so because they have a very secured deposit base from equity, repo and savers paying them very low interest rate as we all know.

For Maxi-Cash, they have to borrow from banks which will not only charge them a higher interest rate but also restrict the amount of money they can borrow. The only way out is for them to issue debt and equity to increase their loan portfolio.

Shanrui_91 had forced me back on Maxi-Cash research. It is ok, probably i can learn from the discussion.

First of all, may i say that if sufficient fund acquired, the biz model is profitable? The issue now is how can Maxi-Cash secured fund to expand, an operating issue.

Pre-listing, Maxi-Cash got their fund from Aspial via direct funding or guarantee fund. Refer to page 41, total secured fund is 153.9 Mils, used 117.9 Mils, 77% used, still have 27% under utilized.

Post-listing, as commented, Maxi-Cash beside Aspial support, it can also raise fund via bond/right as other listing companies. I will not mind Maxi-Cash doing it, since it will be used to generate more value to shareholder. Bank do the same with various preferential share scheme.

So may i conclude Maxi-Cash should be no problem to secure sufficient fund? This is in fact an edge of Maxi-Cash over other pawnshops.

One last issue with maxi-cash is that their ROA is being capped as a result of the Pawnbroker act which allows a maximum interest rate of 1.5% to be charged per month. Maxi-cash is already operating near this level as they are charing 8.5% for 6 months loan. The only way for them to increase their ROA is to lower cost or to fully loan out their asset. To increase profit, they have to increase their asset size which is what this spin off is intended for.

8.5% per 6 months secured loan interest and sustainable is very good biz model. Isn't it? I agreed with you, to get spin-off is favorable to Maxi-Cash, an edge over other pawnshop.

Not forgetting that loan's interest rate is at its historical low at the current level. When the global economy recovers and interest rate starts to rise, their cost of capital will increase and hence reduce their profit margin and ROA.

Pawn broking is a relatively safe business especially in Singapore. However, due to restriction of their interest rate as well as inability to gear up as much, they lose out to our banks.

They could also get into the red if they expand too fast and interest rate starts to creep up when the economy recover. The only economy of scale that they get to enjoy is a lower interest rate and lower fixed cost of advertising as compared to other pawn shops.

It is difficult to debate with an imaginary environment. I would like to use common sense approach instead

Credit card biz with maximum unsecured 24% pa interest rate survive under n cycle of high capital cost? Bank's overdraft facilities also survive with its 10-15% pa interest rate. Will pawnshop survive with its maximum (1.5%*12) 18% pa secured interest rate? I seriously think so.