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24 Oct 2013

ValueMax Group Limited  Intrinsic Value  IPO Price

Moving Up to the Next Stage ValueMax Group Limited (ValueMax) will be issuing 138m new shares at S$0.51 each, representing 25.9% of its number of shares, under its IPO. The application list will close on 28 October 2013 and trading will commence on 30 October 2013. The IPO looks attractively priced as the issue price of S$0.51 works out to a FY12 P/E of 16.7x, compared to 22.4x for MoneyMax and 47.4x for Maxi-Cash. Moreover, the company has outlined plans to expand more aggressively post-IPO, thus giving promise of further upside in FY14.

S$0.820 S$0.510

 Main Activities

Established in 1988, ValueMax Group Limited is one of the oldest and most established pawnshop chains in Singapore, providing pawnbroking services and the retail & trading of pre-owned jewellery and gold. As of September 2013, the company has 17 outlets in Singapore and five outlets in Malaysia. Financial Highlights (Y/E Dec) S$m

FY12

FY13F

FY14F

Revenue

513.2

323.8

359.4

Gross Profit

27.8

27.4

34.7

Profit After Tax

16.9

14.1

19.6

Fundamental Drivers:

EPS (S cts)* 3.05 2.52 *Adjusted for the enlarged share capital

3.54

 Rejuvenation of Industry: The pawnbroking industry saw healthy growth in recent years due to the proliferation of modern chain pawnbrokers who have launched various marketing campaigns to attract customers. The reduced stigma associated with pawnshops bodes well for future growth.

Source: Voyage Research Estimates

Key ratios (FY14F) PER

14.4

P/BV ROE

1.69 12.1%

Debt/Equity

43%

Current ratio

2.3

Source: Voyage Research Estimates

 Sole Pawnshop with Overseas Operations: Compared to MoneyMax and Maxi-Cash, ValueMax has already been operating out of Malaysia for about seven years and is in a strong position to further expand overseas.  Curveball Strategies: ValueMax seems to be more receptive towards inorganic growth. The acquisition of existing pawnshops will allow the company to capture good locations and existing customer bases, as the market becomes increasingly well penetrated. Another “curveball” move is ValueMax’s plan to open a high end pawnshop in Singapore, catering to pledges of value more than S$50,000, thus capturing a new market segment.  Attractive Upside: ValueMax intends to distribute 50% of its FY13 to FY15 PATMI to shareholders. Our valuation suggests that the company may be worth S$0.820 per share, translating to a richer FY12 P/E of 26.8x based on the post-IPO number of shares.

Page 1 of 20

IPO Details No. of Public Offer Shares No. of Placement Shares Float to Public Issue Price Net Proceeds to ValueMax Close of Application List Date of Trading Issue Manager

5.0m 133.0m 25.9% S$0.51 S$66.3m 28 Oct 2013, noon 30 Oct 2013, 9am Canaccord Genuity Singapore Pte. Ltd.

*Timelines are indicative Stock Details Number of Shares Market Capitalization *Post-IPO

533.5m S$272.1m

Analyst: Liu Jinshu, Lead Analyst [email protected] Tel: 6227 2107

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24 Oct 2013

Old Hand in the Business Background: ValueMax Group Limited can be traced back to 1988 when Managing Director and CEO Mr. Yeah Hiang Nam started Ban Soon Pawnshop together with other third parties. Over the next 25 years, Mr. Yeah grew his stake in the single pawnshop to one of the largest pawnbrokers1 in Singapore with associated outlets in Malaysia. ValueMax entered the Malaysian market in 2007 and, to the best our knowledge, is the only one of the three major listed Singapore pawnshop chains to have active operations in Malaysia.2 Singapore - 16 pawnshops cum pre-owned jewellery retail outlets - 1 standalone pre-owned jewellery retail outlet - 2 associated pawnshops cum pre-owned jewellery retail outlets Malaysia - 4 associated pawnshops cum pre-owned jewellery retail outlets - 1 associated standalone pre-owned jewellery retail outlet Key forms of revenue include 1) Interest income from the provision of loans 2) Revenue from the retail & trading of pre-owned jewellery and gold. For the financial year ended December 2012, ValueMax reported pro-forma net profit attributable to shareholders of S$16.3m on revenue of S$513.2m. MoneyMax and Maxi-Cash reported less revenue and profit than ValueMax as ValueMax has been able to build a substantially larger revenue base from the retail & trading of pre-owned jewellery and gold, with standalone retail outlets.

Figure 1: FY12 Revenue

Figure 2: FY12 PATMI

S$m 600.0

S$m 18.0

16.3

400.0

200.0 0.0

12.0

486.7

22.3 ValueMax

78.2 22.3 Maxi-Cash

58.1 17.5 MoneyMax

6.0

Sale and/or trading of Pre-Owned Jewellery and/or gold Pawnbroking Source: Company, Voyage Research

5.8 4.2

0.0 ValueMax Maxi-Cash Source: Company, Voyage Research

1

We use the terms pawnbrokers and pawnshops interchangeably in this report. The other two pawnbrokers are Maxi-Cash and MoneyMax. MoneyMax has three dormant subsidiaries in Malaysia. 2

Page 2 of 20

MoneyMax

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Figure 3: Approximate Locations of ValueMax Owned and Associated Outlets

Source: Company IPO Prospectus, Voyage Research

Figure 4: Approximate Process Flow and Revenue Sources

Source: Company, Voyage Research

Page 3 of 20

24 Oct 2013

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24 Oct 2013

Pawnshop Loans – A Growing Form of Financing Consumers Taking out Larger Loans from Pawnshops: Between 2006 and 2012, the number of pledges pawnshops in Singapore received from customers grew from 2.8m per annum to 4.0m per annum, translating to a six year CAGR of 6.0%. Loans given out grew from S$1.6bn to S$7.1bn over the same period, representing CAGR of 28.5%, and outpacing the number of pledges made. The healthy growth rates translate to higher demand for pawnbrokers’ services over the years. …Outpacing Credit Card Loans: In contrast, total credit card billings per year grew by a CAGR of 12.8% over the same period, with rollover balances growing at a more subdued CAGR of 10.0%. Industry Size Becoming Significant: In terms of loan quantum, pawnbrokers seem to be becoming a key source of financing for consumers as total loans given out in 2012 is equivalent to 18.4% of total credit card billings compared to 8.4% in 2006.

Figure 5: Pawnbroker Pledges Received m 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

3.50 2.83

2.72

2.69

15.0%

2.98

2.78

17.5% 14.5%

7.2%

0.0%

-1.3% -3.6%

2007

10.0% 5.0%

3.3%

2006

20.0%

4.00

-5.0%

2008 2009 Received

2010 2011 Growth

2012

Figure 6: Pawnbroker Loans Given Out S$bn 8.0 7.0 6.0 5.0 4.0 3.0 1.57 2.0 1.0 0.0 2006

80.2%

4.95 2.75

1.63

1.82

3.9% 2007

36.8%

2.01

11.7% 9.9%

2008 2009 Given out

90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 42.9% 30.0% 20.0% 10.0% 0.0% 2012 7.07

2010 2011 Growth

Source: www.singstat.gov.sg, Voyage Research

Source: www.singstat.gov.sg, Voyage Research

Figure 7: Credit Card Billings

Figure 8: Credit Card Rollover Balance

S$bn 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

25.0% 30.94

21.5% 22.64

25.66

35.23

38.42 20.0%

26.03

15.0% 18.9%

18.64 13.4%

10.0%

13.9% 1.4%

2007

2008 2009 Total Billings

2010 2011 Growth

Source: www.singstat.gov.sg, Voyage Research

13.4% 4.54

5.0 4.0

3.0 9.1%

2006

S$bn 6.0

2.0

5.0%

1.0

0.0%

0.0

2012

2.82

2.98

3.38

3.70

4.01 13.0% 10.0%

9.6% 5.6%

2006

2007

8.4%

2008 2009 2010 2011 Rollover Balance Growth

Source: www.singstat.gov.sg, Voyage Research

Page 4 of 20

4.99

2012

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

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Extensive Marketing Raised Consumer Adoption: The expansion of pawnshop chains over the last five years has seen the industry undergo some aggressive changes. New pawnshops opened in recent years boast of modern shop designs and attractive locations and pawnshop chains have also embarked on prolific mass media advertising campaigns and engaged local celebrities to endorse their brands. We reckon that these moves have led to consumers being more willing to make use of pawnshop services. Complemented by More Pawnshops Being Opened: At the same time, more pawnshops were opened to bring their services closer to customers. The number of registered pawnshops in Singapore grew from 138 in 2009 to 191 in 2012 (200 as at 1 September 2013). The statistics work out to a threeyear CAGR of 11.4%. In turn, the number of pledges received on a per pawnshop basis actually grew by only 1.4% CAGR from 2009 to 2012, versus 13.0% CAGR for the total number of pledges received. As such, network expansion has been a key driver of industry growth.

250 200 150

163

175

191

138

Figure 10: Pledges / No of Pawnshops Thousands

Figure 9: No of Pawnshops in Singapore

100 50

0 2009

2010 2011 No of Pawnshops

Source: www.ipto.gov.sg, Voyage Research

22 21 21 20 20 19 19 18 18 17 17

21.0

20.1

18.3

2009

2012

20.0

2010 2011 2012 Pledges Received / No of Pawnshops

No of Pledges Received (Fig 5) / No of Pawnshops (Fig 9) Source: Voyage Research

Getting Higher Quality Customers: Another change we observed was that pawnshops have been receiving higher value items as pledges. In 2006, the average loan given out per pledge received was S$556. By 2012, the average loan given out per pledge received has grown to S$1765. Our view is that the modern, friendlier image of pawnshops today may have led to them attracting better quality customers who pledge higher value items and are less sensitive to the stigma of borrowing from pawnshops. Furthermore, organized pawnshop chains may have the financial resources and technical expertise to receive high value pledges and give out larger loans.

Page 5 of 20

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No Longer Lender of Last Resort: Pawnshops actually do offer benefits to customers who may also qualify for bank loans and are not necessarily for consumers who have exhausted their available bank credit facilities. -

Loan facilities from banks take time to be approved, require the disclosure of financial information and outstanding balances need to be repaid on a timely basis for the borrower to maintain a clean credit score. Loans from pawnshops can be disbursed on the spot and only need to be renewed or repaid at the end of the redemption period of usually at least six months.

-

Pawnshops offer a convenient way for consumers to monetize their assets. Consumers do not risk bankruptcy as unredeemed pledges are ultimately sold off to repay outstanding balances. Furthermore, more pawnshops are offering customers the option of outright selling their jewellery and valuables.

Figure 11: Loans / No of Pledges S$ 2,000

53.3%

1,500

1414

Figure 12: Pawnshop Loans 1765

0.60 0.50

20.0%

18.4% 14.0%

15.0%

0.40 922

1,000 556

599

679

722

0.30

27.7% 24.8%

500

13.2% 7.8%

0.20

6.4%

0.00 2007 2008 2009 2010 Loans Given Out / No of Pledges

Source: www.singstat.gov.sg, Voyage Research

8.4%

7.2%

8.9%

0.0%

2011 2012 Growth

2006 2007 2008 2009 2010 2011 2012 Pawnshop Loans (calculated as % of Credit Card Billings) Source: www.singstat.gov.sg, Voyage Research

Growth Opportunities: Pawnshops in Singapore tend to accept more traditional pledges such as jewellery, gold, gems and branded watches. High end pawnshops that accept luxury handbags, cars, and private art collections are being opened in countries such as US, UK and Hong Kong. 3 , 4 The development of the high end pawnbroking market segment overseas suggest that there is still scope for the Singapore pawnbroking market to grow.

4

7.7%

5.0%

Industry Gaining Self Sustaining Momentum? The revitalization of the pawnbroking industry, in our opinion, has resulted in an enlarged base of recurring customers, who appreciates the convenience of pawnshops, and its size in turn facilitates faster diffusion of pawnshop services to new customers. As such, we maintain a generally positive outlook for the pawnbroking industry.

3

7.1%

0.10

0 2006

10.0%

http://www.mirror.co.uk/news/uk-news/posh-pawn-channel-4-documentary-2278787 http://www.reuters.com/article/2013/07/02/us-financing-pawnbrokers-idUSBRE9610QX20130702

Page 6 of 20

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Boom Spreading Across the Causeway Pawnshops in Region Enjoying Brisk Business: The pawnbroking industry boom is not restricted to Singapore. Media reports suggest that pawnshops in Malaysia, and even Thailand, have been enjoying brisk business. 5 , 6 In Malaysia, there are 355 pawnshops registered with the Ministry of Housing and Local Government and local banks such as Bank Rakyat and Agrobank, as well as Pos Malaysia, the local variant of SingPost, operate at least another 192 Ar-Rahnu or Islamic pawnbroking branches.7 In particular, Pos Malaysia’s growth in this business has been rapid, expanding from 2 branches in July 2012 to some 50 branches today. 8,9 Market in Malaysia yet to Reach Singapore’s Level of Maturity: We estimate that there may be close to 800 conventional and Islamic pawnshops in Malaysia at the moment. Available statistics suggest that there were more than 580 such businesses in 2010.10 Based on our estimated number of pawnshops, there are about 37,300 people per pawnshop in Malaysia. The market in Singapore is relatively well penetrated with a ratio of 27,800 people per pawnshop as of 2012. As such, there is still scope for higher penetration of pawnshops across the causeway.

Figure 13: Total Population / Pawnshops 60,000 50,000

48,187 37,296

40,000

31,145

30,000

27,812

20,000 10,000 0

Malaysia, Singapore, Singapore, 2012 2010 2012 Total Population per Pawnshop Source: Various Sources, Voyage Research

Figure 14: No of Pawnshops, by State Perlis Sarawak Melaka Sabah Negeri Sembilan Terengganu Kuala Lumpur Pahang Penang Kedah Kelantan Johor Perak Selangor

Malaysia, 2010

10

18 19 21

34 35 36 40 44

0.0 Conventional Pawnshops

http://www.reuters.com/article/2013/09/10/us-asia-pawnshops-idUSBRE98908520130910 http://www.freemalaysiatoday.com/category/leisure/2013/09/12/the-pawn-industry-quickmoney-at-a-price/ 7 http://emaps.kpkt.gov.my/emaps/umum/cari_ppg_sc.cfm?PageNum=2&PageMula =513&ORG=P&NEGERI=00&SSM=&tembok=300&sbPageNum=2&sbPageMula=446&sbtembok=250 8 http://postandparcel.info/48515/news/companies/pos-malaysia-sets-up-islamic-pawn-brokingbusiness/ 9 http://www.pos.com.my/pos/services/ARRAHNU/ARRAHNU_Overview.aspx 10 http://www.slideshare.net/azilaupsi/economic-significance-of-islamic-pawnbroking-in-malaysia 6

Page 7 of 20

71

79

50.0 100.0 Islamic Pawnshops

Source: See Footnote 10, Voyage Research

5

56 61 64

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Gearing for Growth Riding on Industry Growth: To further tap onto the growth of the pawnbroking industry in Singapore and in the region, ValueMax has outlined plans, among other initiatives, to a) b) c)

Expand its network of pawnshops locally and overseas Establish a flagship high end store in 2014 Extract further synergies between the pawnbroking and pre-owned jewellery retail businesses.

We like ValueMax’s overall growth strategy as it is not merely reliant on network growth within Singapore, but also attempts to spearhead industry developments in respective markets, such as the creation of modern pawnshops in Malaysia and the development of the high end pawnbroking market in Singapore. These moves draw on opportunities that are currently not fully exploited and avoid head-on competition. Expansion of Network Locally & Overseas Organic Growth Component - Two New Outlets on the Way: ValueMax has entered into a lease for a pawnshop and retail outlet at 96 Serangoon Road and expects to commence operations for this outlet within 2013. Over in Malaysia, ValueMax, via associated company Kedai Emas Well Chip, has entered into a lease for a pawnshop and retail outlet at Taman Universiti, Johor. Potential M&A? Other than opening these outlets, ValueMax is also looking at acquiring or investing in existing pawnshops in Singapore and Malaysia and may expand into other countries in the region by setting up self-owned pawnshops or entering into JVs with partners; albeit as and when opportunities arrive. The acquisition of significant interests in existing pawnshops is a characteristic of ValueMax’s strategy, based on the company’s history. As such, we are of the view that the company routinely studies potential acquisition or investment targets and may already have several pawnshops in mind to acquire or invest in. M&A – An Astute Move: ValueMax’s strategy of complementing organic growth with inorganic expansion plans can be said to be an astute move. This is because quite a number of pawnshops in Singapore and Malaysia continue to operate in the traditional format, i.e. with metal grill bars and high counters. These pawnshops are likely to be supported by a base of loyal customers, but may have difficulty acquiring new and younger customers. Such shops represent potential targets for ValueMax which can inject its established processes, systems and branding into them. In turn, ValueMax benefits from the acquisition of new customers. Page 8 of 20

24 Oct 2013

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Customer Base to Be More Important: Moreover, investing in existing shops rather than opening totally new outlets avoids head-on competition in an increasingly well penetrated market in Singapore where good locations are well sought after. At this rate, we reckon that the ability of pawnshops to develop and maintain profitable customer bases will matter more than the opening of new outlets. The importance of “good” customers is further suggested by the company’s policy of offering, from time to time, selected customers interest rates of less than 1% per month, after approval has been obtained from the group Executive Director in consultation with the Managing Director and CEO of the group. Aiming for the Right Size: ValueMax only has 15 self-branded pawnshops compared to 30 Maxi-Cash and 27 MoneyMax outlets in Singapore. 11 The rest of ValueMax’s two associated and two investee outlets in Singapore operate under their own brand names.12 However, we noted that ValueMax has, on a per outlet basis, the highest pawnbroking income from the provision of loans and the largest amount loans receivable. As such, we can infer that ValueMax takes a judicious approach towards the opening of new outlets. Although its conservatism has resulted in a smaller network in Singapore, ValueMax seems to perform strongly on a per outlet basis and runs lower risk of having to close down underperforming outlets should industry conditions worsen.

Figure 15: FY12 Pawnbroking Revenue Income S$m 25.0 22.3 20.0 15.0

122.9

22.3 157.7

10.0

5.0 0.0 ValueMax Maxi-Cash Pawnbroking Revenue

35

Receivable S$m 180.0 160.0 17.5 140.0 120.0 100.0 115.3 80.0 60.0 40.0 20.0 0.0 MoneyMax Loans Receivable

Source: Respective Annual Reports & Prospectus, Voyage Research

11

Figure 16: No of Own Brand Outlets 28

30 25

26 27

22 19

20 15

30

12

14 15

10 5 0 ValueMax

Maxi-Cash FY11

FY12

MoneyMax

To-Date

Source: Respective Annual Report & Prospectus, Voyage Research

Based on respective company websites as at October 2013

12

One associated pawnshop Ban Soon Pawnshop is now majority owned by ValueMax as a result of the restructuring exercise undertaken in preparation for the IPO. Page 9 of 20

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Figure 17: FY12 Revenue per Outlet

Figure 18: FY12 Loans Receivable per Outlet

S$m 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

24 Oct 2013

S$m

1.7

10.0

9.5

8.0 0.9

6.3

6.0

0.8

5.1

4.0

2.0 0.0 ValueMax Maxi-Cash MoneyMax FY12 Pawnbroking Revenue per Average Outlet

Source: Respective Annual Reports & Prospectus, Voyage Research

ValueMax Maxi-Cash MoneyMax FY12 Loans Receivable per Average Outlet Source: Respective Annual Report & Prospectus, Voyage Research

Associated Pawnshops Contribute Positively: ValueMax’s associated pawnshops in Singapore and Malaysia, on a pro-forma and post restructuring basis, contributed net profit of S$1.9m in FY12, which is quite significant compared to the group profits of its competitors. This information is further evidence that inorganic growth can be more profitable than opening new outlets. Creating a New Market Segment We also like ValueMax’s plans to open a high end pawnbroking cum preowned jewellery retail flagship store in 2H 2014. Accordingly, the company is exploring suitable locations for this store, but has yet to sign any lease for it. The plan is to target high net worth individuals with articles of pledge values of more than S$50,000 with services provided in the privacy of VIP rooms. This move fits into industry trends that we have observed, such as a) customers pledging higher value items and taking out larger loans and b) the growth of high end pawnshops overseas. If successful, similar flagship stores can be opened in overseas markets. Extracting Further Synergies between Pawnbroking and Pre-Owned Jewellery As part of its growth strategy, ValueMax is also looking at offering incentives to cross fertilize the pawnbroking and pre-owned jewellery retail businesses. For example, the company is looking at given pawnbroking customers preferential prices when purchasing pre-owned jewellery. We are sanguine about such moves as they fit into the overall objective of raising the value of each customer. Other plans include the development of the “Spring Jewellery” pre-owned jewellery brand as well as to increase branding and marketing activities for ValueMax pawnshops. On the whole, ValueMax’s plans point to a more aggressive expansion strategy post-IPO. Page 10 of 20

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Figure 19: Corporate Structure, Key Entities and Principal Activities Holding Company

ValueMax

VMM Holdings

Subsidiary / Associates / Investments ValueMax Pawnshop (SG) ValueMax Pawnshop (JP) ValueMax Pawnshoop (WL) ValueMax Pawnshop (PR) ValueMax Pawnshop (CCK) ValueMax Pawnshop (BK) ValueMax Pawnshop (EL) ValueMax Pawnshop ValueMax Pawnshop (BD) Spring Jewellery (SG)

% Stake 100.0% 100.0% 97.5% 90.9% 100.0% 100.0% 100.0% 100.0% 97.7% 100.0%

No of Outlets 3 3 2 2 1 1 1 1 1 1

ValueMax Retail

100.0%

NA

ValueMax Management

100.0%

NA

ValueMax Corporate Services

100.0%

NA

ValueMax Precious Metals

100.0%

NA

ValueMax International

100.0%

NA

Ban Soon Pawnshop Soon Hong Pawnshop** Ban Lian Pawnshop** Ban Seng Pawnshop***

50.5% 50.0% 19.8% 19.0%

1 1 1 1

Fook Loy Trading***

19.0%

NA

VMM Holdings SYT Pavilion** Thye Shing Pawnshop** Kedai Emas Well Chip** Kedai Pajak Well Chip**

100.0% 46.6% 46.6% 46.6% 46.6%

NA NA 1 1 2

SYT Pajak Gadai Bintang** 100.0% 1 Pavilion** ** Associated companies from the perspective of ValueMax *** Investments from the perspective of ValueMax Source: IPO Prospectus, Voyage Research

Page 11 of 20

Operating Country

Remarks

Pawnshop

Singapore

Pre-owned jewellery shop Pre-owned jewellery retail within premise of ValueMax outlets Management and IT services Business management and consultancy services Retail & trading of pre-owned jewellery Investment holding and provision of management services Pawnshop

Malaysia Malaysia

Malaysia

Goldsmith, second hand goods dealer, buying of pledged articles Investment holding for Malaysia entities Investment holding Pawnshop Retail & trading of pre-owned jewellery Pawnshop Pawnshop

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Strengths to Guard Market Position Integrated Backend Operations: As a pawnbroker with a chain of outlets, ValueMax has access to unredeemed pledges and pre-owned jewellery sold by customers. The scale allows the company to recondition pre-owned jewellery in house and scrap gold is in turn sold to refiners or melted into bars to be on-sold to factories and wholesalers. In turn, the company captures the full value of unredeemed pledges and purchased jewellery. Complementary Gold Trading Business: The company also trades gold, purchasing them from suppliers and reselling them to retail customers, jewellery retailers and factories. Hence, the company takes on a distribution role in the gold business. ValueMax is one of the larger local gold traders in Singapore with revenue of more than S$450m in FY12. This business activity is complementary to ValueMax’s pawnbroking and preowned jewellery retail businesses as it provides the company with information about trends in the industry such as demand for gold among other retailers. Such information in turn may affect the valuation that the company offers for pledges and pre-owned jewellery, as well as, selling prices and inventory decisions. Pawnbroking Still Key Profit Generator: Nonetheless, pawnbroking remains a key profit generator for ValueMax, accounting for 68.1% of group net profit before tax, even though the sale and trading of pre-owned jewellery and gold accounts for the bulk of the company’s revenue. Such differences in margins occur as the pawnbroking business incurs mainly finance costs for each additional loan disbursed. ValueMax pays a floating rate for its borrowings, which are re-priced every six months or less, and charges up to 1.5% per month for loans to customers. The cost of goods sold for pre-owned jewellery is mainly their acquisition cost paid to the customer.

Figure 20: Gross Profit, by Segment

Figure 21: Profit before Tax, by Segment S$m 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

S$m 25.0 20.4 20.0

15.0

17.1 13.7

10.0 5.4

7.4

5.4

5.0

0.0 Pawnbroking FY10 Source: Company, Voyage Research

10.4

11.5

8.7

4.6 5.0

1.4 1.6 1.9 Pawnbroking

Retail & trading of pre-owned jewellery and gold FY11 FY12

Retail & trading of pre-owned jewellery and gold FY10 FY11 FY12

Source: Company, Voyage Research

Page 12 of 20

3.4

Others

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www.voyageresearch.com Highly Experienced Team of Appraisers: As a highly established pawnbroking business, ValueMax boasts of a highly experienced and qualified team of experts. The chief appraisers in its outlets have between 10 and 50 years of experience in dealing with jewellery and valuables. Several of them are also certified diamond graders accredited by the HRD Antwerp Institute of Gemology. We view ValueMax’s team of chief appraisers as an asset. Their abilities allow the company to accept different purities of gold, various qualities of diamond and different brands of watches as pledges. As such, the company is less likely to turn away customers or undervalue their pledged articles. The provision of competitive and yet appropriate valuation of pledges in turn allow the company to attract and retain customers, while not taking excessive risks.

Figure 22: Management Reporting Structure

Source: Company, Voyage Research

ValueMax is organized along two key departments - Pawnbroking & Retail and Valuation & Wholesale. The wholesale business refers to the company’s gold trading activities.

Page 13 of 20

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Key Risks Regulatory Changes: The operation of pawnshops in Singapore and Malaysia are subject to specific laws and only licensed persons can carry out the business of pawnbroking. In Singapore, the Ministry of Law is proposing to amend the Pawnbrokers Act to do away with the requirement of having to auction off unredeemed pledges, improve protection for pawners, strengthen the governance of the industry, among other objectives.13, 14 Some of these proposed changes will benefit ValueMax. For instance, the company can directly take ownership of forfeited pledges and resell them after reconditioning or de-manufacturing under the proposed changes. However, certain changes will place higher compliance requirements, and hence costs, on pawnbrokers, such as the proposed increase of security deposit per premise from S$20,000 to S$100,000. We are uncertain about when and if these changes will be enacted and refrain from further speculation on their impact on the company. Details of the proposed changes can be referred to via the hyperlinks in footnotes 13 and 14. At the moment, the changes seem beneficial for the industry by increasing consumer protection and hence reducing barriers towards the adoption of pawnbroking services. Risks from Gold Prices: The company expects to earn a larger proportion of its revenue from pawnbroking and the sale of pre-owned jewellery, compared to gold trading in FY2013. Revenue from gold trading is likely to be impacted by lower gold prices, which fell from a high of US$1,770 in September 2012 to under US$1,200 per ounce in June 2013. Moreover, the company has also made allowances of S$0.7m in each of FY12 and 1Q FY13 to cover for the risk of the value of unredeemed pledges being unable to make up for the value of loans granted. The company has stated in its prospectus that a 5% change in the prevailing market price of gold is not expected to have a significant impact on the Group’s financial statements. Moreover, lower gold prices raise the affordability of jewellery and may benefit pre-owned jewellery sales. We reckon that this risk is being mitigated by the company pegging loan amounts at a fraction of the value of pledged items and that the company is focusing on growing its core pawnbroking and pre-owned jewellery businesses. Growth from these higher margin activities offer profits that may be able to partially offset the risk of lower gold prices.

13

http://www.mlaw.gov.sg/news/public-consultations/public-consultation-on-proposedamendments-to-pawnbrokers-act-2013.html 14 http://www.mlaw.gov.sg/news/public-consultations/responses-pawnbrokers-act-2013.html

Page 14 of 20

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Interest Rate Risk: As regulated by the Pawnbrokers Act of Singapore, ValueMax can only charge a maximum interest of 1.5% per month for loans given out. Currently, ValueMax charges an incentive interest rate of 1.0% in the first month of a loan, followed by 1.5% per month thereafter. However, ValueMax finances its borrowings at floating rates every six months or less. As such, ValueMax faces the risk of lower margins if interest rates (with ValueMax as the borrower) rise. The effective interest rates for ValueMax’s borrowings range from 1.49% to 5.68% as at 16 September 2013. For FY12, a 50 basis points variance in interest rate would have led to a S$0.43m fluctuation in profit before tax. We reckon that the public listing of ValueMax provides an added tool for the company to manage its overall cost of capital. Our analysis of ValueMax’s historical financials suggests that the company has been reducing its leverage and enjoying lower interest costs, based on ratios such as debt to common equity and annualized interest expenses as a percentage of average borrowings. The risk of higher interest rates can also be offset over time by the company expanding into regimes with higher pawnbroking rates. For instance, pawnshops in Malaysia charge interest rates of about 2% per month. As at 31 August 2013, ValueMax’s total borrowings amount to S$89.9m compared to gross bank overdrafts and revolving credit facilities of S$149.65m as of 16 September 2013. As such, the company has a significant amount of unutilized credit facilities.

Figure 23: Total Borrowings

Figure 24: Total Finance Costs S$m

S$m

94.4

100.0

144.7%

120.8%

80.0 63.0

60.0

84.4

133.8% 77.5

40.0 20.0 0.0 FY10 FY11 Total Borrowings Source: Company, Voyage Research

113.3%

160.0% 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0%

2.5

0.4

4.0%

0.3

2.0 1.5 1.0 0.5

0.2

3.3%

3.0% 2.6%

1.9%

1.9

1.6

0.0

2.0

0.0 FY10

FY11 FY12 Presented as Finance Costs

0.4 1Q FY13

Included in Cost of Sales

FY12 1Q FY13 Gross Debt to Common Equity

Average Annualized Interest Cost Source: Company, Voyage Research

Page 15 of 20

2.0% 1.0% 0.0%

IPO Highlight

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Financial Analysis, Forecasts & Valuation IPO Statistics: Further information about the IPO of ValueMax is as follows:  

 

Issue of 138m new shares at S$0.51m each, split between 133m placement shares and 5m “public” offer shares. Net proceeds of S$66.3m, after deducting expenses of S$4.1m, will be used for business expansion (S$39.8m) and for working capital purposes (S$26.5m). Application will close on 28 October 2013, noon and trading will commence on the morning of 30 October 2013. Post invitation share capital comprise of a total of 533.497960 shares, representing a market capitalization of S$272.1m at S$0.51 each.

Overview of 1Q FY13 Performance: ValueMax reported net profit attributable to shareholders of S$3.95m on revenue of S$91.5m for 1Q FY13. 1Q FY12 net profit attributable to shareholders was S$5.26m on revenue of S$147.6m. The decline in revenue was in part due to lower contribution from gold trading as a result of declining gold prices and a decrease in sales of gold bars. Pawnbroking revenue fell by S$0.8m year-on-year in spite of a 4.1% increase in the number of loans granted as the loan value granted during 1Q FY13 was lower due to the decline in gold prices, which affected the value of pledged articles for the loans. The lower revenue, which affected gross profit, and higher operating expenses led to the decline in net profit attributable to shareholders. Forecasts for FY13: Gold prices only bottomed out in June 2013 at around US$1,200 per ounce. During 1Q 2013, gold prices ranged between US$1,550 to US$1,650 per ounce. As such, we expect ValueMax to report lower revenue from gold trading in 2013. Lower revenue is likely to be mitigated by higher gross margin given that a larger proportion of sales will now be contributed by pawnbroking and the retail of pre-owned jewellery. In all, we expect ValueMax to generate revenue of S$324m in FY13 compared to S$513m in FY12. Net profit may decline to S$14.1m compared to S$16.9m in 2012. We are conservative about FY13 profitability as the company is also likely to experience higher administrative expenses due to one-off IPO costs.

Page 16 of 20

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Expect Stellar 2014 Performance: Nonetheless, we are optimistic about the company’s FY14 performance. Following the IPO of ValueMax, we reckon the company will be able to expand at a faster pace and execute many of its plans, including the opening of new outlets and the acquisition of other pawnshops. We expect the company’s revenue to grow by about 10% to 11% annually in FY14 and FY15 as it expands its network of outlets. Higher contribution from pawnbroking business is also expected to raise net margin from 3.2% in FY12 to 5.3% by FY14. In all, we expect ValueMax to post a steady rebound in FY14 and report net profit after tax of S$19.6m. Shareholders to Benefit via Dividends: ValueMax has stated that it intends to distribute 50% of its profit after tax attributable to shareholders for each of FY13, FY14 and FY15. As such, shareholders can expect to be rewarded while the company executes its expansion plans. Intrinsic Value Pegged at S$0.820: In valuing ValueMax, we adopted a five year forecast horizon from FY13 to FY17. Key assumptions are provided in Figure 25. We note that forecasting risk is high as the company is a new IPO and is in the midst of executing its expansion plans. Nonetheless, the company’s peers MoneyMax and Maxi-Cash trade at FY12 P/E ratios of 22x and 47x respectively. Our valuation of S$0.820 for ValueMax works out to 27x FY12 P/E and 32x FY13 P/E; and can be deemed to be in the range of the P/E of its peers.

Figure 25: Key Assumptions No of Pawnshops (SG) PB Revenue per Outlet (S$m) RPOJG Revenue (S$m) Growth Rate Gross Margin - PB Gross Margin - RPOJG Operating Expenses (S$m) Eff. Tax Rate

FY12 16 1.4 486.7 91.5% 1.1% 12.0 11.6%

FY13F 17 1.4 300.0 -38.4% 90.0% 2.0% 14.4 14.8%

FY14F 21 1.4 330.0 10.0% 90.0% 2.5% 15.7 15.1%

FY15F 24 1.5 363.0 10.0% 90.0% 2.5% 16.4 15.1%

FY16F 27 1.6 399.3 10.0% 90.0% 2.5% 17.1 15.0%

FY17F 30 1.7 439.2 10.0% 90.0% 2.5% 17.9 14.9%

PB: Pawnbroking RPOJG: Retail & Trading of preowned jewellery and gold

Source: Voyage Research

Figure 26: Peer Comparison

as at 22 Oct 2013 ValueMax Group Limited Maxi-Cash Financial Services Corporation Ltd MoneyMax Financial Services Ltd.

Mkt Cap (S$m) 272.1 196.9 130.9

FY12 PATMI (S$m) 16.3 4.2 5.8

FY12 Equity (S$m) 144.4 63.6 39.4

P/E 16.7 47.4 22.4

P/BV 1.9 3.1 3.3

FY12 ROE 12.1% 7.7% 16.0%

*Based on IPO prices. Total Common Equity, ROE and ROA have been adjusted to include the IPO proceeds of S$66.3m Source: Voyage Research

Page 17 of 20

FY12 ROA 6.5% 2.4% 4.6%

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Figure 27: Valuation Model S$m Revenue EBIT Tax on EBIT NOPLAT Invested Capital % Debt % Equity WACC Capital Charge Economic Profit Terminal Value Discount Factor Present Value Book Value + IPO Proceeds Explicit Value Terminal Value Value of Equity Number of Shares Value per Share

FY13F 323.8 16.9 -2.5 14.4 175.9 53.6% 46.4% 5.5% -9.8 4.6

FY14F 359.4 23.4 -3.5 19.9 224.6 30.9% 69.1% 7.4% -16.7 3.2

1.00 4.6 144.4 38.9 253.7 437.0 533.5 0.820

0.93 2.9

FY15F 399.0 30.2 -4.5 25.7 234.7 29.6% 70.4% 7.5% -17.7 8.0

FY16F 442.5 37.9 -5.7 32.2 247.7 28.0% 72.0% 7.7% -19.0 13.2

0.86 0.80 6.9 10.6 Risk Free Rate Beta Market RP Cost of Equity Cost of Debt LT Growth Rate

Source: Voyage Research

Figure 28: Stress Testing Our Valuation Factor Increase Cost of Equity by 1% pt Decrease Cost of Equity by 1% pt Keep PB revenue per outlet at S$1.4m throughout Set RPOJG revenue growth rate at 5% for FY14F to FY17F Set RPOJG revenue growth rate at 15% for FY14F to FY17F Reduce FY13F to FY17F PB gross margin by 1% pt Reduce FY13F to FY17F RPOJG gross margin by 1% pt

Valuation 0.698 0.975 0.635 0.777 0.867 0.808 0.720

Source: Voyage Research

Page 18 of 20

Variance -0.121 0.156 -0.184 -0.042 0.048 -0.011 -0.099

FY17F 490.2 46.4 -7.0 39.5 274.0 29.0% 71.0% 7.6% -20.8 18.7 340.0 0.75 13.9 2.50% 1.0 7.50% 10.0% 2.0% 2.0%

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Figure 29: Financial Forecasts and Estimates S$m Revenue Gross Profit EBIT Net Profit Attributable to Shareholders

FY10 398.4 19.1 15.2 12.9

FY11 531.9 24.4 17.8 14.5

FY12 513.2 27.8 19.5 16.3

FY13F 323.8 27.4 16.9 13.5

FY14F 359.4 34.7 23.4 18.9

FY15F 399.0 41.5 30.2 24.7

FY16F 442.5 48.9 37.9 31.2

FY17F 490.2 56.9 46.4 38.6

Total Current Assets Total Non-Current Assets Total Current Liabilities Total Non-Current Liabilities Total Equity

131.3 5.3 91.9 0.0 44.6

179.8 5.6 126.0 0.0 59.3

197.0 10.3 125.7 0.1 81.5

230.8 14.4 89.9 0.1 155.2

238.0 32.0 104.6 0.1 165.3

222.5 50.3 94.4 0.1 178.4

244.6 69.6 119.5 0.1 194.7

234.2 90.3 109.8 0.1 214.6

Cash from Operating Activities Cash from Investing Activities Cash from Financing Activities Net Change in Cash

-24.1 0.3 20.4 -3.4

-21.0 0.4 17.5 -3.1

15.5 -0.1 8.9 24.4

55.6 -4.1 34.6 86.0

-9.9 -17.6 -9.5 -36.9

24.0 -18.3 -12.4 -6.7

-0.8 -19.3 -5.6 -25.8

34.5 -20.6 -19.3 -5.4

Inventory Days Receivable Days Payable Days

N/A N/A N/A

16 90 25

23 110 26

25 150 25

25 150 25

25 150 25

25 150 25

25 150 25

N/A N/A 144.7% 1.4

12.4% 6.6% 133.8% 1.4

12.1% 6.5% 120.8% 1.6

11.7% 6.2% 45.9% 2.6

12.1% 7.6% 43.2% 2.3

14.8% 9.4% 40.1% 2.4

17.3% 10.9% 42.1% 2.0

19.5% 12.3% 38.2% 2.1

2.42 8.16 21.1 6.25

2.72 10.85 18.8 4.70

3.05 14.64 16.7 3.48

2.52 28.33 20.2 1.80

3.54 30.10 14.4 1.69

4.63 32.42 11.0 1.57

5.86 35.35 8.7 1.44

7.23 38.96 7.1 1.31

Return on Common Equity Return on Assets Gross Debt / Common Equity Current Ratio EPS (S cents) BV / Share (S cents) PER P/BV

Source: Company IPO Prospectus, Voyage Research

In this report, we presented pro-forma financial numbers to the extent that they are available. Prior to the IPO of the Group, ValueMax underwent a restructuring exercise and pro-forma financial statements reflect the group’s performance for 2012 and 1Q FY13 as if the restructuring exercise had been conducted earlier. Per share data are based on the post-IPO number of shares.

Page 19 of 20

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IMPORTANT DISCLOSURE: As of the date of this report, the analyst and his immediate family may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. Portfolio structure should be the responsibility of the investor and they should take into consideration their financial position and risk profile when structuring their portfolio. Investors should seek the assistance of a qualified and licensed financial advisor to help them structure their portfolio. This research report is based on information, which we believe to be reliable. Any opinions expressed reflect our judgment at report date and are subject to change without notice. This research material is for information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive or access this research material. It is not to be construed as an offer, or solicitation of an offer to sell or buy securities referred herein. The use of this material does not absolve you of your responsibility for your own investment decisions. We accept no liability for any direct or indirect loss arising from the use of this research material. We, our associates, directors and/or employees may have an interest in the securities and/or companies mentioned herein. This research material may not be reproduced, distributed or published for any purpose by anyone without our specific prior consent.

Page 20 of 20

Moving Up to the Next Stage ValueMax Group Limited

S$66.3m. Close of Application List. 28 Oct 2013, noon ... Malaysian market in 2007 and, to the best our knowledge, is the only one of the three major listed Singapore pawnshop chains to have active operations in Malaysia.2. Singapore. - 16 pawnshops cum pre-owned jewellery retail outlets. - 1 standalone pre-owned ...

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