Challenger Technologies

[profeszor]

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

Under the 'sudden' weak quarter lies many other problems that have been building up in Challenger and those in the similar businesses as well.

1. The margin has been continually compromised to fight against competitions in the field, especially in the IT accessories business which they face much threat from online stores. These online stores and providers, such as those we see from Qoo10 and ebay, do not require "the rental, staff, [and] depreciation charges" which were pointed out as the main cause for the squeezed margins at Challenger.

A glance at their margins will immediately tell you that this company might be facing some problems:

2013- 5.405%
2012- 5.791%
2011 -6.002%
2010 -6.845%
2009 -7.125%

And for the record, their recent quarter NPM only yield 3.98% (compared to 4.5% on the same quarter previous year)

Challenger has been covering up their extremely compromised margins by emphasizing their revenue growth -- which was the only saviour to the company's bottom line. Now that the revenue line is exhausted (due to saturation of market?), the underlying problem has surfaced: intense competition on a very replicable business in a very small market.

2. Instead of changing their business strategy to find a service or product which they can sell on a higher margin, they instead went head on with the low-margin industry by bringing their own Valore brand to fight with this competition. Needless to say, their online competitors are more efficient (cost-wise), and Challenger might not have made a very wise decision to go head on with these competitors whom have absolutely no issues with 'barriers of entry' to such a business. i.e. Challenger has no distinct advantage over its competitors in this this accessories product war (except for their brand, which hasn't receive favourable publicity with their power banks catching fire).

Also, the panoply of products presented in their stores is impressive, but it also has the problem of having too damn many products, which costs SPACE to showcase their use, thereby rendering such a business strategy very costly (in comparison to their cheap online competitors). Also, a purchase of a power bank can be deemed as a one-time sale, since I don't have to replace my power bank like I do with handphones.

3. If one went long on Challenger on the bet that their expansion will correlate with profit growth, one can see this might not be a correct assumption. From the early 2000s to the late 2000s, Challenger has grown tremendously due to their success in Singapore, and investors were also sanguine on the prospect that perhaps such a success can be replicated overseas -- which Challenger did venture in Malaysia only to achieve a small fizzle before deciding to end the whole endeavour recently.

This goes to show that Challenger's success is difficult to replicate in a different country (think of the potential lost in Jakarta, Kaula Lumpur and other high population density cities in SEA) due to very different consumer tastes and expectations. The expansion in Singapore has probably already reached its peaked and the law of diminishing marginal returns has likely kicked in.

One question to ask: does Challenger really need that many stores? Perhaps. But does it need more? Most likely not. And if they should not expand any more in risk of diminishing returns, what are the growth prospects?

In the recent quarterly results the CEO said "we are also looking into exploring expansion opportunities via sales of our private label products in the ASEAN region." But we do not know the impact of these little ventures should they be successful, and how much the CEO think these little ventures would turn about the obviously troubled business.

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The future for Challenger does seem bit bleak from my analysis. Since the demand for IT products from now to the short-term future should stay about the same (unless there's another consumer technological upheaval like the iPhone which started the accessories revolution), the revenue should lie about flat, and their diminishing margins do no help in maintaining investor's confidence.

(divested in March)
(also, the liquidity of this stock is a bitch, which forced me to split my trade into 3 individual trades on different days incurring me extra commission costs from my broker, uh.)