Saturday, January 22, 2011

The Good: Teo Guan Lee Corp

Nope, this is not a poultry industry business although company with this kind of name tend to be involved in poultry business. Rather they are in primarily apparels industry and a little property investment (less than 2% of revenue). There isn't much to talk about the company's history. It started in 1934 as a small enterprise dealing in general merchandise. Now it has 2 offices; 1 in Prai and another in KL, 9 boutiques and 400 consignment outlets. (Anyway i copy this from their website so you can just read from there)

Apparels
Its apparels business includes manufacturing, marketing and distribution. Basically from front end manufacturing to sales. Well, apparels business is typically very competitive in Malaysia because somehow, we aren't that good at branding our goods which could have give this sort of business great economic advantage, pricing power, apart from the likes of Padini (locally) and Bonia (internationally). So, what do Teo Guan Lee (TGL) has? Well, the company name may not sound sexy but their brands do (not all entirely theirs). They have 2 house brands and 8 character licensing brands.

House Brands: KikiLala, Cuddles
License Brands: Sesame Street, Garfield, Power Puff Girls, Tom&Jerry, Popeye, Ultraman, Pixie&Dixie, Pronic

I think you would have able to guess TGL is in kid's apparels business. For their house brand, I believe KikiLala has a strong branding locally and would appeal to most parents. Trendier parents might prefer the likes of Guess Kids, Gap Kids or Baby Gap but that is entirely a different market. For the license brand, they are able to product products using the character brand mentioned and when you look at them, they are about fun and kids wanna have fun. So the bigger name might sound a little...boring I guess. But their advantage is not entirely protected for 2 reasons. First they don't have exclusive right to produce them. Second, is the threat from "pasar malam" products. Walk out to a pasar malam or any store, you'll definitely see one of those. So the only way to differentiate themselves is the quality and of course the appeal.

Being in a kids' apparels business is quite different from the adult one as business tend to be very cyclical as parents would tend to buy more new clothes for kids during festive season particularly during CNY as a set of new clothes is a must by Chinese tradition of course not forgetting Hari Raya as well. But, if they buy from TGL this year, you can be reassure they'll llikely to return the year after because kids tend to grow faster when they are....kids. So there is some form of repeatability there but TGL may still need to cushion the low season. Probably would prefer CNY and Aifilfitri falls on a different quarter. TGL did okay last 4 quarters and manage to register profits although I think mainly cushioned by rental income from properties.



Financial Fundamental
When you look at fashion and apparels businesses, the No.1 thing that would worry is the inventory. And TGL did quite average in comparison to its peers although they are in a different business. Table below are measured in months. You can clearly see why Yen Global is struggling.


We have seen better brand products tend to command better margin. However for TGL, although they have good branding appeal with their license products, they still couldn't top it. Maybe parents are more sensible towards their kids and purchases are less impulsive.


But I would say, there could be a little untap pricing power potential for TGL although they could afford to have lower margin as they do not need to spend much on SGA expenses. They could just leverage on Cartoon Network. In 2010, TGL generates RM4 on every RM1 spend on SGA, Padini (RM2.87), Bonia (RM2.17), Hing Yiap (RM4) and Yen Global (RM1.80). 

From 2006-2010, liquidity for TGL is a bit of a worry as it has stay below 1. But it has steadily improved from 0.46 to 0.76. And from the latest quarterly report, it has now improved to 0.93. 

DE ratio has improved as well to about 33.3%. Receivables turnover rate is pretty average which is about less than 2.5months probably due to their heavy reliance on consignment outlets sales. It is pretty clear as Padini managed less than a month, Bonia and Hing Yiap less than 2 months while struggling Yen Global needs about 8 months!

So fundamentally they are OK and things seems to get better for TGL.

Properties
I never like businesses that diverse into property investment. It doesn't make too much sense to shareholders as well. And owning a property for rental income from Corporate is not a good idea due to double taxation (corp tax + witholding tax for dividend). BUT, TGL case is different in fact I am quite glad that the management did that as it provide some income and liquidity during the low season.



Valuation
I do like Teo Guan Lee business model actually as the don't have to worry too much on the marketing side. This gives them the advantage to keep the cost down although they would to pay for licensing fees. But this do make their work whole lot easier. If you can't beat 'em, buy 'em. Trend? What trend? The management has also keep looking for new licensing opportunity over years and in 2009 they have secure "Transformer" license just when the movie was a hit.

So the golden question is, how much would you pay? 

Revenue growth wise, TGL isn't really exciting. Although revenue CAGR for past 5 years is about 8.4%, I am looking at about 3%. Parents seems to have control their spending on kids during bad times. But TGL does have enough pricing power to pull when needed after looking at their 2007 result (manage 14.4% growth in sales when gross margin improves by 1045 basis point). 2007 is when commodities prices are on the rise.

With cost of revenue at about 63.1% of revenue, SGA expenses at 25.9% and Capex average out to RM1.4mil, the adjusted fair price to pay for TGL would be RM1.85.  

1 comment:

Anonymous said...

how about dividend and pe