Derek Tan contributed this article to NextInsight
I STARTED TO track ValueMax Group closely after it acquired VM Credit to go into the secured loan business in Nov 2014.
Taking in goods such as gold, jewellery, watches and luxury branded bags (Hermes, Chanel, LV etc), ValueMax has been in the money lending business for more than a year already, and it seems to be expanding aggressively. This enticed me to pay even more attention to the company.
Such a business model will always enjoy constant demand for its services, even more so during economic downturns.
Pawnbroking: Typical pledges include jewellery in yellow or white gold, diamond and branded time pieces; gold, platinum or silver bars and coins; and designer luxury handbags. This provides steady and stable income flow for the company.
Gold Trading: An important source of income for the group. The Group's purchases scrap gold from other pawnbrokers and jewellery traders, while it sells fine gold bars to jewellery factories, wholesalers and retailers.
Money Lending: In Nov 2014, ValueMax acquired VM Credit, which holds a moneylender license to provide secured and unsecured loans; grant term loans secured by mortgages of private residential and commercial properties, targeting mainly businessmen and corporations that have urgent cash needs.
The Emphasis on Lending Business
“More emphasis will also be placed on the development and growth of our money-lending business by offering primarily secured loans.
"As we aim to expand our jewellery retail business, our gold trading business is expected to remain stable. We remain focused on our strategic priorities to generate growth.”
-- Phua Tin How (Non-Executive Chairman) / Yeah Hiang Nam (MD and CEO) in ValueMax annual report FY 2015).
It appears that ValueMax is aggressively going into the secured money lending business.
It recently issued S$50,000,000 of bonds with a 5.5% coupon which were fully subscribed. I understand there was strong demand for this $50m prior to issuance. I expect there will be another round of fund raising due to the high demand, with yields likely to be lower than 5.5%.
I foresee secured loans to be in high demand partly due to the stringent rules which make borrowing from the banks difficult for some people who already have borrowings elsewhere or have relatively low reported incomes.
Terms of lending are flexible and borrowers can redeem the loans anytime. Time frames for loans can be anywhere from 6 months to more than 5 years.
Property is used as collateral with Loan to Property Value (LTV) of not more than 60% along with endorsements from one established valuer to ensure the fair value of the asset.
ValueMax may help customers to redeem their bank loans if the outstanding loans are low enough, and then re-mortgage the assets with ValueMax at higher loan quantums.
It will be a first charge loan -- ie, ValueMax has the first right to claim against the property in the event of default.
Loan approvals for unencumbered properties can be obtained within a week or two, and are not subject to certain MAS guidelines.
Operating cost in the moneylending business is relatively low due to lesser manpower, fewer outlets and lower rental costs. And it is able to generate more attractive returns.
There are a total of 330,303 private residential units in Singapore. This figure excludes the 24,919 vacant units as at 1qtr 16, HDB commercial shophouses and private commercial units such as shop houses, offices, retail shops etc… I do not have the statistics for commercial property (private and HDB shophouses, office and retail units etc) but estimate them to total around 50 – 100k or more commercial units in the market.
Property prices have more than doubled over the past 10+ years, hence, there is a significant number of properties with low LTV. Thus, the market for ValueMax's lending business is HUGE!
Many high-net-worth businessmen stay in private landed properties, which are worth a few million dollars. Thus, the loan amounts available to them can be very significant. If the average loan amount works out to be $1.5 to 2m each, it would just take 25-33 cases to fully loan out the $50m raised from the bonds.
This will definitely appeal to some businessmen who need help with their cash flow, which is often the most vital aspect in keeping their business running.
Due to slowing economic growth, job cuts, many business are facing tight cash, so pawnshop business is expected to increase even further.
|Profit estimate for SG$50m bond|
|Bonds $50m @ 5.5% interest||($2,750,000)|
|Assumed interest charge @ 12%||$6,000,000|
|Costs such as bank charges, legal fee, commission, underwriting etc, conservative est.@ 3%||($1,500,000)|
Pawnshop businesses have not been doing well in the past 3+ years. There were some regulatory changes in April 2015 which scrapped the auction for unredeemed pledges, allowing pawnshops to sell their goods directly to customers, which enabled them to create greater manpower efficiency, saving administrative costs, security costs and auction fees
Pawnshops are starting to be more innovative. They are starting to take in more products such as luxury branded bags etc.
“Going into the lending business and expanding reasonably recently seems to be a good move and right timing for ValueMax. It definitely helps many business owners to get over their short term cashflow difficulties. I believe it to be a good strategy and likely be able to help the company to achieve higher profit in next few quarters.
"Is this a very high risk business and will the pawnshop experience loan defaults? That will be the major concern for many investors. With LTV of 60% and below, and with property as collateral, what are the chances of loan defaults? This will only happen if property prices in Singapore fall more than 40%. I will not be really concerned about their debts given the trustworthy collateral such as properties and gold.”
-- Derek Tan
Of course, there are risks in all investments. For ValueMax, there are always rising operation costs and competition.
Revenue from retail and trading of pre-owned jewellery and gold business was down by $57.5m in FY 2015.
The pledge loan book as at end of 2015 was about $136m of which approximately 85% would be in gold or jewellery and 70-80% in gold.
The company has plans to expand further through acquisitions and in Malaysia. Out of 25 outlets in Singapore, the company currently owns 4 units for strategic and competitive advantage. It recently purchased 11 units at Waterloo Centre for its flagship store and HQ which will be ready probably in the next quarter.
The rest of the ValueMax outlets are mostly rented from HDB, some from SMRT and others are in shopping malls.
ValueMax's current public float is 18.91%, and the Yeah family controls nearly 80% of the shares.
|Stock price||26.5 cents|
|52-week range||20 – 31.5 cents|
|Market cap||S$141 million|
|Shares outstanding||533.5 million|
I think ValueMax is prudently and carefully run, and has a good business model. So is the stock at the right price now? Will it recover to the IPO price of $0.51?
Growth is what I am looking for! Its trailing dividend yield is 3.58%, and ValueMax is likely to maintain distribution of at least 50% of net distributable profit
When I was about to complete this report, Singapore's May export figures were announced: Exports unexpectedly rose 11.6% from a year ago, gold exports up 436.7% due to uncertainty in the market.
The price of gold year-to-date had gone up 20.6%.
Will all this help to contribute significantly to ValueMax's near-term results?