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Is Old Chang Kee a value trap?

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Since young, I have always enjoyed eating Old Chang Kee’s signature curry puffs. The history of Old Chang Kee, however, goes as far back as 1956 when it was just a small stall in a coffee shop outside former Rex cinema. In 1986, the current chairman, Han Keen Juan bought over the control of the company and subsequently transformed the stall into a listed company.

On looking back, Old Chang Kee is a story of coming of age and its brand is synonymous with Singapore food heritage. With a humble beginning, Han Keen Juan has certainly grown the Old Chang Kee into a household name.

When it was listed in Catalist in 2008, the IPO price was $0.139 and the shares were 111% over-subscribed. Now trading at $0.815, it is time to examine whether investing in the shares is worth the effort.

Old Chang Kee

Fourth quarter loss

The Group was cruising along finely when it was hit by a 4Q2017 loss of $2.1 million. Prior to this, total revenue had been growing steadily from $65.6 million in 2013 to $78.3 million in 2017. However, net profit declined from $6 million in 2014 to $4.9 million in 2016. The net profit FY2017 was even worse – at $1.7 million, a decline of 64.9% year-on-year.

The surprising loss was due to the increase in other expenses of approximately S$3.3 million in FY2017 was mainly due to the following:

(a) revaluation deficit for the Group’s Singapore and Malaysia factory building by approximately S$3.0 million;

(b) higher foreign exchange losses of approximately S$384,000 primarily on Malaysian Ringgit denominated loans to associated and subsidiary company; and

(c) allowance for doubtful debts for amount due from an associated company, amounting to approximately S$117,000.

On closer examination of the financial result, the revaluation deficit should be one-off loss and not a scheduled depreciation expenses.

Business fundamentals

Apart from the shock quarterly loss, the balance sheet looked reasonably well, although not exactly very strong. The amount of cash and cash equivalent stood at $15.5 million, more than sufficient to pay off the short-term and long-term debts. But what I like about the company is the asset-lite and simple business model.

Cash flow from operations for FY2017 was $10 million, a decrease from $12 million in FY2016. After deducting the $8.2 million used for purchasing property, plant and equipment, the free cash flow was only $1.4 million. With such a small war-chest, it is unlikely that management would pursue an aggressive expansion plan.

The company basically sells snack and promote its brand through outlets strategically located at different areas of Singapore. Curry times, a curry theme restaurant at Changi Airport Terminal 3 is also under Old Chang Kee. In recent years, there was expansion into overseas, such as Australia Malaysia and Indonesia.


Like many food and beverage company, Old Chang Kee’s growth is greatly impacted by the foreign labour tax and the tight labour market.  Due to the shortage of labour in the food industry, labour costs are expected to rise in order to attract staff.

The decision to expand into overseas market came at a price. In FY2017, the company suffered higher foreign exchange losses of approximately S$384,000 primarily on Malaysian Ringgit denominated loans to associated and subsidiary company. Hence, foreign currency exchange losses will continue to weigh on the Group.

With a market capitalization of only $98 million, Old Chang Kee is considered a very small listed company. Being small, the company lacks the investment moats to withstand changing demographics, evolving market trend and adverse market conditions. In view of this, it may lack the economy of scale to negotiate bulk purchases for raw materials from the suppliers.

Another risk factor to consider is that the core product of the Group is basically snack. There are many substitutes for the signature curry puffs it is selling. Besides pitting against so many different type of competitors, OCK’s products may also be sensitive to economic downturn. Consumers are likely to snack less during times of hardship. This probably explains why Old Chang Kee’s shares languished at $0.20 level for several years during the Great Financial Crisis.

Stock evaluation

With net asset value of $0.22 and P/E ratio of a whopping 57.7, the shares are definitely inflated. Return on Equity (ROE) has been falling from 15.8% in FY2015 to 6.3% in FY2017. ROE measures how efficient the management deploys shareholder fund to generate returns. All these data suggested that Old Chang Kee shares may have peaked.

Based on the above factors, I will not be investing in Old Chang Kee. Although the branding is reasonably good, the company lacks investment moat to ward off stiff competition and adverse market conditions. For those who had made substantial paper gains from the bullish run over the last few years, it may be time to take stock and rationalize whether to continue holding the shares.

Investors should note that Han Keen Juan is not exactly a company founder. He is actually a businessman who bought over a business and transformed it into a well-known brand. Although he may be passionate about the business, he may not carry the type of emotional attachments like many founders. After all, most venture capitalists are interested in the returns and not the day-to-day running of the business.

It has been a good and exciting journey for Han Keen Juan and at his age, he may be tempted to call it a day. With a direct and deemed interest of 65.93%, Han Keen Juan’s stake in Old Chang Kee is worth a cool $66.4 million. In view of the declining performance, now may be a ripe time for Han to divest his stake and enjoy life in retirement.

Lastly, one thing I dislike about small cap SGX stocks is their low trading volumes. For Old Chang Kee, the average 3 month volume was only 30,000. With such low liquidity, investors would face much difficulty in disposing the shares during market corrections. Hence, Old Chang Kee may be a value trap in my opinion.

Read my other articles on SGX stocks:

  1. Formidable Challenger for Challenger Technologies Limited
  2. The Hour Glass Limited
  3. Raffles Medical Group’s Return on Equity

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