• Well Chip Group Bhd provides pawnbroking services, retails and trades new and preowned jewellery and gold. We like the company on the back of its (i) expansion plansof the upcoming 7 new pawnshops in Johor (5) and Melaka (2), (ii) positive outlookon gold prices that bode well for the gold trading segment, and (iii) growing numberof underserved customers.

• For FY24-25f, we project the topline growth of 10% to RM224.0m and RM246.4m,respectively, supported by the growth from the planned expansion of the newpawnshops, and the positive outlook of gold prices. Meanwhile, we project the corePAT to expand 12.3-14.2% to RM41.6m and RM46.7m.

• We derived a fair value of RM2.33 for WCGB. Our fair value of RM2.33 (upside of 103.1% against IPO price of RM1.15) is derived by pegging a P/E of 30x to the FY25f EPS of 7.8 sen. We believe a forward P/E of 30x is justified as it is in line with the YTD average current P/E of the selected peers.

Investment Highlights

Expansion of 7 new pawnshops in Johor and Melaka. As of the LPD, Well Chip Group Bhd (WCGB) operates 23 pawnshops in Johor and it plans to open 5 new pawnshops in Johor and 2 new pawnshops in Melaka to increase market share in Johor and penetrate the market in Melaka. Furthermore, WCGB’s future expansion strategy is to eventually increase market share in the other states. We believe WCGB’s track record and expertise will be integrated into the new pawnshops, which should reduce operational risks and improve the group’s revenue.

Positive outlook for gold prices would bode well for the gold trading segment. We believe the current elevated inflationary pressure should continue to be a catalyst for sustained uptrend in gold prices. As a result, WCGB should see revenue improvements in the trading of gold & gold jewellery segment as WCGB will be able to sell the gold items at a marked-up value representing the difference between the increased prices to the prices during procurement.

Growing number of underserved customers. From 2024 to 2028, Protégé Associates estimates the pawnbroking industry is estimated to grow at a CAGR of 11.4%, underpinned by demand for immediate access to funds and demand from the unserved population. Conventional loans require strict requirements namely credit scores which may prevent capable customers from securing loans. This trend is expected to continue due to the uncertain Economic conditions ahead which bodes well for pawnbrokers.

Company Background

WCGB’s history traces back to 2006, where they started the pawnbroking services business and the first pawnshop was opening in 2007. The business has expanded to 23 pawnshops and 4 retail outlets as of LPD.

Business Segments

Provision of pawnbroking services (35.9% of Revenue). WCGB provides pawnbroking services where they offer pledges-backed pawn loans with a short repayment period to pawnbroking customers. WCGB charges 1-2% monthly interest rate and a one off RM0.50 administrative fee on pawn loans which has a period of 6 months. Acceptable pledge items include gold & gold jewellery, luxury watches and diamond jewellery. Loan margins for gold & gold jewellery are up to 95%, 60% for luxury watches and 30% for diamond jewellery. Upon expiry of the pawn loan period, customers can choose to redeem pledges, or renew the pawn loans after settling outstanding debt and the new loan amount is subject to re-assessment. Customers will need to pay the difference in pawn value in the case that the pledged item has decreased in value. Customers who do not redeem pledges, renew the pawn loan or pay the interest charge will be given a 3-month grace period before the items are considered property of WCGB and WCGB will be permitted to sell them.

Retail and trading of jewellery and gold (64.1% of revenue). WCGB also sells and trades jewellery and gold through: (i) WCGB’s retail outlets adjacent to the pawnshops, (ii) online and (iii) scrap gold traders. The gold and gold jewellery are procured through (i) unredeemed pledges and (ii) purchase of gold and jewellery from walk-in customers which will be reconditioned and sold.

Financials

In FY23, WCGB’s core PAT increased +38.2% YoY to RM36.4m from RM26.4m, in line with the topline improvement from RM158.1m to RM203.7m (+28.8% YoY). The revenue increase was mainly due to gold prices increasing which allowed WCGB to lend out larger loan amounts, on top of the opening of 3 new pawnshops in FY23. Furthermore, the retail and trading of gold or gold jewellery increased as a result of increased unredeemed pledges.

For FY24-25f, we project the topline to see improvement of 10% to RM224.0m and RM246.4m, respectively, supported by the planned expansion of the new pawnshops, the increased capital from the IPO proceeds and the positive outlook of gold prices. Also, we expect the core PAT to grow by 14.2% and 12.3% to RM41.6m and RM46.7m for FY24-25f, respectively.

Valuations

We derived a fair value of RM2.33 for WCGB. Our fair value of RM2.33 (upside of 103.1% against IPO price of RM1.15) is derived by pegging a P/E of 30x to the FY25f EPS of 7.8 sen. We believe a forward P/E of 30x is justified as it is in line with the YTD average current P/E of selected peers.

Investment risks

Exposed to gold price fluctuations. WCGB sells unredeemed pledges of gold and gold jewellery in the case of defaults from clients to recover cash. Therefore, a sustained downtrend in gold prices may cause WCGB to sell the gold items at a loss.

Strong competition from other industry players. There are more than 805 active licensed pawnbrokers in Malaysia in 2022, therefore WCGB faces strong competition from its peers. In the case that, industry players reduce the offered monthly rates to customers to improve competitiveness, it will adversely affect profit margins.

Exposed to physical security risks and trustworthiness of personnel. WCGB operates the retail and trading of jewellery and gold, therefore the operation is subject to theft, burglary which may incur losses from robbers as well as from internal personnel.

Subject to regulatory requirements. Any unfavourable regulatory policies from the authorities such as the lowering of the maximum allowed interest rates may affect profit margins.

Source: Mplus Research - 10 Jul 2024