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Formidable challenger for Challenger Technologies Limited

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Crisis? What crisis? SGX mainboard-listed company, Challlenger Technologies Limited, appears unfazed in the aftermath of the closure of its 53,000 sqft megastore at Funan DigitaLife Mall since December 2015. Last year has been challenging due to the weak economic sentiment but on the basis of the 3Q2016 financial results, it seems that Challenger managed to reduce the impact of its megastore closure.

Last week. I visited the Challenger Technologies store at Bedok Point mall to purchase a software and was very impressed by their staff’s customer service and efficiency. Prior to the trip, I had done some research online and thus only spend less than 5 minutes in the shop. The whole experience had been positive but in the face of stiff competition from online and brick-and-mortar players in the market, Challenger faces a daunting journey ahead.

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While Challenger tried to downplay the significance of the closure of its Funan DigitaLife mall through the rapid expansion of heartland retail stores, it has since moved on and announced a new flagship store at Bugis Junction. Spanning almost 14,000 square feet in space, the basement 1 location is set to open by the second quarter of 2017. In addition to complementing the existing Challenger store at level 3 Bugis Junction, the new flagship store will add to the Group’s overall portfolio of almost 50 stores island-wide.

In today’s context, the concept of a “destination specialist shopping mall” is not relevant anymore as there are so many channels for consumers to make purchases with the advent of e-commerce. In this respect, Challenger has correctly anticipated the changes in retailers’ lifestyle trend. Their strategy is to complement (and not substitute) their physical stores with their online stores. This is important as even though the online space offers tremendous opportunities for growth, physical presence is still needed to showcase the customers’ products and capabilities.

However, with online retail giant Amazon setting up shop in Singapore by early 2017, it is not going to be business as usual for the IT retailer. As Singapore market is very small and saturated, Challenger’s market share will likely be affected with the entry of Amazon. It is still early days and Challenge has claimed that it will not take on the retail online giant but instead collaborate together. With such formidable “challenger” coming its way, Challenger’s CEO Loo Leong Thye is indeed putting on a brave front. To top it off, he even claimed a sales target of $1 billion to be achieved in 5 years’ time.

Whether Challenger can achieve that lofty sales target remains to be seen but given that Challenger’s current principal market is in Singapore, it will be a tall order. It is not mission impossible because the company’s business model is scalable. But to achieve this target, Challenger needs to start conquering regional markets.

To hit the billion dollar sales target, Challenger will need a grandstand performance as revenue remained flat at $256.0 million for the nine months ended 30 September 2016. The current soft market also saw profit after tax decreased by 16% to $9.1 million. To tackle the weak retail market sentiments, the group is banking on their online marketplace, to provide more channel offerings for customers. Challenger is also rationalizing weak performing retail stores and focus growth in strategically located stores like Tampines Hub and the new flagship store in Bugis Junction.

Balance sheet continued to be healthy with total current assets at $89.6 million and total current liabilities at $25.2 million. Net Current Asset Value per Share (NCAVPS) was $0.18 and Net Asset Value (NAV) at $0.22. The net operating cash flow was $7.8 million and free cash flow was $6.6 million. The cash generated by operations allows Challenger to embark on acquisitions to spur growth. In fact, Challenge Ventures Pte Ltd was established in Q32015 to invest in digital businesses and services. One such service is the group’s existing end-to-end integrated marketing solutions provider, inCall System Pte Ltd, which has been injected into CVPL. Another business is e-commerce marketplace Andios, which provides customers a platform to buy or sell their smartphones online. Apart from digital businesses, the Group has plans to establish a logistics hub in Singapore for ecommerce warehousing and fulfilment.

While critics may lament that it is a bit late for Challenger to enter the online business scene, I feel that it is better to be late than never. Investing in online startups involves certain level of risks and it is important for Challenger to invest prudently in online ventures that are relevant and can add value to its business, such as mobile marketplace, e-wallet and technology websites.

At the end of the day, in order to capture business growth, it is time for Challenger to venture overseas. Growing more retail stores and investing in online companies will have limited impact on revenue growth as Singapore market is too small for the company to evolve into a big boy. How many walk-in and online customers can Challenger count on to bolster its market share in Singapore? The arrival of Amazon could shake up the whole IT retail industry in Singapore, possibly even changing the game. If Challenger is not careful, it may find itself being drowned by the oncoming tidal wave brought forth by the US giant.

Currently trading at $0.50, the intrinsic value of Challenger should be $0.20. Thus, the current price valuation seems a bit inflated. The share price has obviously surged since the dark days of Great Financial Crisis in 2009 but I find it an attractive growth stock to invest in. The Return-on-Equity (ROE) had been double digits for the past 5 years and the company has no long-term debts. It is too premature to assess the impact arising from Amazon but it will be interesting to know how the stock will perform in 2017 given the headwinds it will face. Hence, I will only enter this stock at $0.30.

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1 Comment

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  1. this is interesting to know that Challenger has a good ROE history, never thought of it would be. its asset turnover contributes.

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