Wednesday, November 1, 2017

Looking Forward To This Challenge!

It has been some time since I talked about any counter. So I decided to talk about a counter I recently purchased. Before I go into the details of the counter, let me explain what had happened recently.

Gain of 30% within 3 Months

Based mainly on the recommendation of the Ultimate Scorecard, I purchased Miyoshi Limited at $0.066 in August 2017 without going as in-depth as I wanted to.

At the end of Oct 2017, I sold all of Miyoshi Limited at $0.085 per share – a 30% gain within 3 months.

I understand I told many that the Ultimate Scorecard required users to hold at least 4 months, but if you already had enough gain, why not just sell it? 

Change of Investment Strategy

I have also posted on InvestingNote recently that I made some observations of my portfolio.

At last count, my overall gain is about 18+% for my portfolio as a whole. But I have actually 4 sub-portfolios and their respective gains are 13%, 14%, 33%, and 17%.

At the start of 2017, the sub-portfolio with 33% gain had over 60% in pennies (below $1, in fact below 60 cents) and “unknowns” that passed my scorecard method.

Next, the sub-portfolio with 13% gain consist of 70% blue chip at the start of 2017.

The other 2 sub-portfolio with 14% and 17% gains are mixed portfolio. The only difference between them was that the 17% sub-portfolio started with a bank counter.

Therefore, 2017 seems to be a pennies bull year. Any investor that started with pennies and held onto them will have a great performance this year.

However, I have also been observing that many counters are taking their turns to rise to “new highs”. This actually worries me, because many of them are rising without specific reasons. I have doubts that this will continue after the 2nd half of 2018. Thus, I decided to go into 2018 with a new strategy.

*Do note that at the start of 2017, I also told my friends that 2017 will be a crisis year. But that didn’t happen. Thus, my prediction may be wrong after all.

The new strategy is to focus more on income investing and be less adventurous.

The breakdown of the portfolio is expected to be the following (Do note that this act as a guide for me only and I do not follow it strictly):

  • 30% will go into counters giving at least 4.5% dividend.
  • 15% will go into blue chip counters.
  • 25% will go into counters that passes the Ultimate Scorecard via Fundamental Scorecard website.
  • 10% will go into counters that purchase due to “a certain story”.
  • 10% will go into US and HK counters.
  • 10% will be kept as cash.

With the above changes in mind, it is important to note that they had influenced me on my purchase of Challenger Technologies Limited (aka Challenger).


Profile In Short (From their website)

With over 35 years of IT retail under its belt, Challenger is Singapore’s only homegrown consumer electronics chain with an extensive network of 38 stores island-wide serving over 1 million ValueClub members to date. Its latest flagship store spanning 14,000 sq ft is now open at Bugis Junction #B1-26. For customers who prefer to shop online, Challenger's Hachi.tech marketplace is the 24/7 option - simply choose between local delivery and convenient in-store pickup.

How did it fare against the Ultimate Scorecard?

Challenger's the Ultimate Scorecard via Fundamental Scorecard Website
Challenger passes the Ultimate Scorecard as of 23 Oct 2017 based on a share price of $0.435.

These are the reasons I bought the counter…

1. Passes the Ultimate Scorecard and Change in Investment Strategy

The Miyoshi incident gave me more confidence of the picks by the Ultimate Scorecard. In addition, I wanted to look for counters that provided dividend yield of at least 4.5%. Thus, when Challenger passes the Ultimate Scorecard and have been giving out a dividend yield of about 5% consistently, I decided to take a deeper look.

2. Proactive Management Action

Since the start of the year, Challenger has been closing down poor performing stores. From Q1 2016, it state that it has 48 stores. As of Q2 2017, it has reduced to 38 stores.

Competition from online portals are VERY REAL and this action from the management shows their proactive-ness.

I believe the management are also shifting the stores around to lower their rental. This can be assumed from their latest new lease at Paya Lebar Quarter commencing in Q3 2018.

3. Improvement in Revenue/Store

Period
Q1 2016
Q2 2016
Q3 2016
Q4 2016
Q1 2017
Q2 2017
Revenue ($’Mil)
88.9
89.6
74.4
83.4
88.9
77.8
No. of Stores
48
44
44
43
40
38
Rev/Store ($’Mil)
1.85
2.04
1.69
1.93
2.22
2.04

From the figure above, you can see that Challenger’s revenue per store is actually improving since the low period of Q3 2016. Nevertheless, this should not be taken as an improvement in sales of each Challenger Store, but on the indication that how its external sales (online channels, signage projects and call center services) has been assisting to push up the overall revenue. Thus, this also highlights how the proactive actions of the management helped with the company's top line.

4. High ROE Consistently and Without Debt

Information Taken from Challenger's Full Analysis Scorecard via Fundamental Scorecard Website
From the above table, it is shown that Challenger has been able to achieve a high ROE of above 20% from 2008 to 2015, despite not having much debt.

5. Shareholders In Line with Retail Investors

70% of the shares are owned by CEO and insiders. This will provide support to the share price and ensure the shareholders’ direction is in line with the retail investors.

6. Branding Power

Recently when I was shifting into my new house, I realised Challenger is at the top of my mind whenever I thought buying computer/network items and its related products. This made me thought of the branding power Challenger has in the minds of Singaporeans.

Nevertheless, to maintain this “Branding” power, Challenger has to have a significant number of stores operating throughout Singapore.

It seems like the proactive management also understand this aspect and has been “shifting some of the stores” around to ensure the rental remains reasonable and Challenger remains at the top of the mind of Singaporeans when it comes to certain electronics.

But nothing is perfect…

Online Competitors and Reducing Revenue

Despite revenue per store improving, Challenger’s top line has been reducing (as per the Full Analysis Scorecard above). This is mainly due to Taobao, Qoo10, Lazada, Amazon and even Carousell. These online platforms have been “eating” away Challenger’s market share by allowing various resellers and manufacturers to sell SIMILAR ITEMS as Challenger, but at a much lower price.

Challenger has since setup their own online platform – Hachi.tech. But it still remain to be seem if this is a long term solution for Challenger to compete with theirs other Online platforms.

Even when there is only 1 risk stated, this risk has the ability to totally remove "Challenger" from the face of Singapore.

In Short

Challenger need to do more to CHALLENGE the online portals, possibility in areas such as user experience. If not, its future remain bleak.

However, its clean balance sheet and strong cash flow will still be able to support its business for the time being. Hopefully its proactive management is able to find a new revenue stream and up its game!

Finally, do note that the 3rd quarter results that will be released this coming Friday. Hopefully it will be a good one!

Current Price: $0.450 as of 1 Nov 2017.

Please do your own due diligence before you invest in this stock. 

Do note the author is vested in this counter/company at $0.425. 

If you are interested to know more about the Ultimate Scorecard/Full Analysis Scorecard or the Fundamental Scorecard Website, do click on this LINK to sign up for our 2nd Value/Growth Investing Workshop! (Left only 5 tickets! Grab them now!)

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