Old Chang Kee

I saw a few interesting reports today, but I chose old chang kee :) Oh, before that, Swiber won some projects worth US$20 million in M'sia and Indonesia. Keep it coming, swiber!

Okay, let's get down to Old chang kee. It's just out of sheer curiosity that I'm interested in their full year financial results. I liked their curry puffs in the past and I always see long queues of people buying their stuff, so naturally I'm interested to see if popular products equates to good business. Old Chang Kee (OCK) recently IPO.

Revenue increased 20% from FY06 to FY07
COGS increased correspondingly by 21.6%
Gross profit rises 19%

The rising prices of flour and other raw materials which OCK used to produce their products must be the culprit here. Does this remind one eerily of Synear, the company that sells dumpling that recently got whacked real hard? Synear also have to cope with rising pork and flour prices that affects that COGS and consequently their margins. Revenue, as the management said, rose due to an addition of 13 more outlets in Singapore. Does it mean that if OCK opens more outlets, their revenue will go up? That's interesting...as it means their products is so popular (which I agree to a certain extent. Just go to OCK outlets and watch the queue during the evening rush hour).

An interesting thing here is the rise of 111.4% of 'other operating income'. They stated that they started to sell their used oil which contributes to S$170,000 in FY2007, which is 0.4% of their total revenues. I think OCK should explore more about this incidental stream of revenue as used oil if thrown away is seriously a waste of money, considering how much oil they use each day for their total outlets.

Net profits dropped 2.5% though, despite having one-off gain from selling their wholly owned subsidiary named 1901 Singapore pte ltd, which operates five 1901 Hot dogs outlet (never heard before). Revenue from 1901 hot dogs contributed to 2.6% of total revenue in FY07, so it wasn't exactly a bad decision. I think OCK is trying to streamline their business, and doing what they do best - which is curry puffs. Again, my wish list for OCK - to provide a revenue data segmented according to products. I think that will be too much to ask for...it's not a wish list for nothing :)

-----------------------------2006-------------2007----------
COGS (% to sales)----------40.9%------------41.4%---------
Gross profit margin---------59.1%------------58.6%---------
Net margins-----------------9.0%-------------7.3%----------
ROE (i used total equity)----39.8%------------30.2%--------

Doesn't look good huh? Even with all the disposal of subsidiaries and hence one-off gains, net margins went down. This is not due to direct cost of goods, but rather something that happened between the gross profit and the net earnings. I'm not really interested to find out what at the moment. ROE isn't exactly encouraging, doesn't look stable.

What i'm really interested in are the red flags detected when I browsed through their financial statements:

1. Under pg 3 of 14, in the balance sheet, there is under 'current liabilities' this very interesting item, "Club membership - current", amounting to $15,000. There also a club membership payable - long term, under non-current liabilities, amounting to another $5000. Are you thinking of what I'm thinking. There's no mention of this in the report, so perhaps if one is interested, one can look for the IPO prospectus for more juicy details.

2. OCK is making quite a lot of short term and long term loans. Increment of 79% of short term loans (both secured and unsecured) and an increment of 222% of long term loans, as at 31st Dec, 2007. Any reasons for this big rise in loan amount? Expansion in PRC? Expansion in Singapore/M'sia?

Net gearing went up from 12.7% in 2006 to 19.2% in 2007.

**net gearing defined as (total liabilities - cash & equivalents) / (total assets - intangibles) x 100

3. Amount due to a related party makes up $2000 found in the balance sheet. In cash flow statements on page 5, there are bad debts written off from "loan from related party" amounting to $77,000 in FY06 and another "loan to an associated company" amounting to $13,000 in FY07. Did you hear my alarm bells ringing? There's more...."provision for doubtful debts - amount due from associated company" amounting to $116,000 in FY07. There's quite a number of these dubious items. Who are these 'associated companies' and 'related party'?

I saw in page 11 that there is a bad debt written off relating to a loan from a related party (an employee of the other shareholder) and investment written off in FY06 of $219,000. More light to shine on this issue please?

Funny isn't it, with all the club membership and related parties and associated companies. Didn't know that we can lend money to an employee just like that. Hmm, I thought curry puffs are simple business, but I think I'm so far from the truth. There's a lot of things hidden between the financial statements, and I wonder who will buy the business. At the current price of $0.200, I consider it very expensive. Why?

With poor earnings visibility, doubtful items in financial statements, overly optimistic outlook (management mentioned the food and beverage industry remains positive due to events and projects like Formula one and the successful bid for Youth olympics and the IR project.....I have to struggle not to scoff at such statements. They did mention rising cost, rental, oil prices and other raw materials to make the industry competitive), I think the valuation is short and sweet.

I'll just take net assets - inventories - intangible = $8,998,000
then find out the number of shares outstanding = 68,400,000
then do a division = $0.1316 per share

Revenue in 2007 is $40,548,000
CAGR revenue from 2006 to 2007 is 20%

Projected 2008 earnings (based on CAGR) = 1.20 x 40,548,000 = $48,657,000
Projected 2008 EPS = 4,8657,000/68,400,000 = $0.7114
Assuming net margins in 2008 to be 7.3% (same as 2007),
net EPS = 7.3/100 x 0.7114 = $0.052

Based on my newbish model of valuation = 0.1316 + 0.052 = $0.183 (this is totally unorthodox, so don't follow me)

Given the circumstances, the margin of safety is set at a high level of 50%.
50% x 0.183 = $0.090

Good for one more puff, if it ever reaches that price by FY08. The valuation is mainly for fun, don't treat it like it's a buy call at that price please :)