Monday, June 6, 2011

Similar But Not The Same

An anonymous reader suggested me to take a look at N2N Connect who are in a business just like Excel Force.  But first apologies when I say I couldn't find a similar business listed on Bursa and thank you to .... well ..."anonymous".

N2N Connect Bhd is the younger siblings of Excel Force. I shouldn't say siblings, they are both competitors to each other. And like Excel Force, they deliver online stock broking system, applies the same ASP model and some other mobile "value added" services to their customers which I think are redundant. Oh come one...instant messaging on GPRS? Their business economics moat is from the ASP model which I have explained in the previous post on  Excel Force. Product wise, I think N2N Connect has a small edge where it is able to provide GTD trades which some traders would love to have (not sure if it is from the broker or the system). But still I don't think that would give them competitive edge as most customers would like prefer cheaper brokerage rates and system stability than services like that.  Anyway, N2N only have worry about the latter half.



Despite similar business model and economic moat of the two, their finances are totally different. One, you see it raking up profits after profits, while the other have an erratic profits margin and at some occasion in the red. It could be one of the two reasons for this. One, is that somehow N2N Connect has a higher cost structure and inefficient. Two, they are on the Amazon-style "get big fast" strategy as striking deals with as many customers as possible is the key to growth. Whichever it is, it is hard to tell for me because its annual report provides too little information about it. (Time for shareholders to speak up!).



Speaking about efficiency, N2N Connect SGA expenses does raise a few question if you look at the table below. Part of the expansion? I don't know. It is hard to tell from the report. Another question is, both Excel Force and N2N Connect operates in the same region and countries (Malaysia, Singapore, Thailand and Vietnam) but they have more than twice the number of employees versus Excel Force (90 vs 39, courtesy of ft.com).



However, N2N did explain in the AR that sudden drops in revenue in 2008 was due lesser trading activities and yea, volume does get thinner from Q4 2008 to probably 2H of 2009 which we saw further shrinkage in revenue. This large impact could suggest that revenue from ASP model dominates their income stream the most (possibly more than 75%) unlike Excel Force which is about two thirds. The details however, can't be found in the AR.



There is another evident that shows just how aggressive N2N expansion strategy is. Their receivables turnover are significantly higher as well.



Valuation
It is hard to draw what their normal earnings are like as there aren't enough information disclosed in its AR. Whether it is due to competitive reasons or trying to hide something, I'll go with the safer bet on Excel Force. But if one were to find out that it is due to bad management or bad investment decision, it could be an exciting opportunity for some groups of value investors. The problem is, how could you derive value from it and how much does it worth?
Could Excel Force capitalize on this? Well, this is the kind of advantage of businesses with a wide moat. They'll just do fine even with bad management and could easily turn earnings around. Threat from Excel Force are minimal or non-existence, perhaps on securing new customers is where they really compete. Unless N2N really screw things up, it is unlikely that Excel Force will benefit from competitor's bad management decision. How this could turn out remains to be seen. I am happy enough to stay at the sideline on N2N Connect.

4 comments:

Anonymous said...

My boyfriend is here...told me that since his company not paying dividend im wondering when will he ever save enough to marry me
:(
does excel force pay dividend? didn't even know n2n made so many years of losses until i read ur post and went checking....do u think it might be good time to buy excel force stock now since price dropped and wait for it to bounce back? or buy n2n?
my boyfriend said he won't sell his shares of his company coz he will lose money....i need to show ur blog to him maybe we'll have a little more faith in the n2n? he gets his bonus in installments and we cannot go on holiday this year :(.......

LuZeeker said...

well, i guess it'll be better if you were to look for financial planner to sort out your saving issue.
As for to hold n2n or to buy eforce?
if u ask me, i'll not be comfortable having my money in n2n than eforce. Mainly bcoz i dun have enuf info i need abt them and dunno how their earning looks like.
it is one of those behavioural financing that ppl would hold on to losers n sell winners bcoz they tot as long as they dun sell, they won't lose. it's a long topic, but in the end, every investment decision must be supported by its fundamentals. if you are able to sleep well after u've made ur investment decision, it means that u've done enuf.

Anonymous said...

Eforce is more conservative, have moderate growth and is profitable. Current eps is about 0.077 cent, so the company is trading at 10x PE and ~2x book value.

N2N is more aggressive (recent building purchase)and is not as profitable (bleeding). Valuation does not matter as the company is making loss.

What is important is the client base, N2N seems to have exclusive contracts will most major brokers, and have large client base. (Maybe because they accept lower margin). Also to note that Najib's younger brother is one of the major shareholders.

Both these companies are highly relying on the Malaysian market, as their overseas venture is producing insignificant revenue. I think Malaysian market will only have 1 dominant stock broking software company, lets see who wins.

Anonymous said...

Najib's younger brother is a major shareholder in Excelforce not n2n just want to clarify on that and not misleading the readers.