Initial Public Offering (IPO)

IPO - Senheng New Retail Berhad (Part 2), QnA from management !!!

MQTrader Jesse
Publish date: Fri, 07 Jan 2022, 04:42 PM
MQTrader Jesse
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Financial Highlights

 
 
  • Revenue growth continuously from FYE 2018 to FYE 2020 shows that companies are still expanding their market share under consumer electrical and electronic retailers. Work from home and study from home has boosted the demand for electrical products such as laptops, monitors, desktops, keyboards, mice, webcams, etc. Therefore the revenue on FYE 2020 will increase because the demand has also increased
  • The net income decreased from FYE 2018 to FYE 2022 due to the increased operating and administrative expenses, finance costs, and the decrease in interest income. 
  • The gross profit margin was considered a good range of over 20%. However, it dropped from FYE 2018 to FYE 2020 (Generally, a GP margin of 20% is deemed high/sound).
  • The PAT margin for Senheng is considered low, which is only 4.3% - 5.2%, as the average benchmark of net profit margin is 10%. However, a good margin will vary considerably by industry. 
  • Gearing ratio under healthy criteria.  (Good gearing ratio should be between 0.25 – 0.5)
  • As Senheng is the only listed company under retailers of consumer electrical and electronic industry, we cannot get the benchmark of financial performance from other companies.

 

Major Customer and Suppliers

Major Customer

As a retailer, Senheng’s customer base primarily comprises walk-in customers at their physical stores and customers who purchase products on online platforms. The sales contribution from each customer as a percentage of the Group revenue is negligible. As such, they do not have any major customers and hence they are not dependent on any single customer for their business. 
 

Major Suppliers

The group's top 5 suppliers by total purchases are as follows:- 
 
 
 
Based on the information, we know that over 40% of the purchases are from Samsung Malaysia and VS TECS. The top 5 suppliers had cooperated with Senheng for more than 15 years, and the majority of the company had collaborated with Senheng for over 20 years.
 
Senheng had mentioned that during the period under review, they had not faced any material supply disruptions or delays by their major suppliers. This shows that Senheng has a very efficient supply chain relationship with its suppliers. 
 
 

Industry Overview

The size of the consumer E&E retail industry in Malaysia, as represented by E&E retail sales of digital gadgets, audiovisuals, and home appliances through physical retail platforms (i.e., physical stores), grew from RM50.45 billion in 2018 to RM54.56 billion in 2020, at a CAGR of 3.99%. It recorded YOY growth of 15.24% in 2019, before a YOY decline of 6.16% in 2020 due to the COVID-19 pandemic that has led to reduced consumer purchasing power, temporary mandatory closure of physical stores and/or physical distancing measures in place during the movement restriction periods, amongst others. While the overall impact of the COVID-19 pandemic on the industry was partially cushioned by increasing demand for certain consumer E&E products (e.g. laptops and computers for work at home and remote study purposes) and financial support by the Government; the overall industry was negatively impacted by the COVID-19 pandemic. 
 
A majority of consumer goods, including consumer E&E products, remain sold through physical stores as shopping at physical retail stores is still the current preferred shopping platform for most consumers in Malaysia, especially for big-ticket items, with online retail outlets serving as complementary platforms supporting the growth of the overall consumer E&E retail industry in Malaysia soon.
 
In 2021, the consumer E&E retail industry was expected to recover. Based on the latest available data, as of September 2021, E&E retail sales were recorded at RM43.76 billion. During the 9 months of RM4.86 billion, the average monthly sales improved by 6.81% from the average monthly sales in 2020 of RM4.55 billion. Following the government's recent upliftment of movement restriction measures on 10 October 2021, economic activities will gradually normalize, and BNM expects Malaysia's GDP to grow within the range of 3.00% to 4.00% in 2021. According to the latest economic outlook published along with Budget 2022, Malaysia's GDP is expected to strengthen and grow between 5.50% to 6.50% in 2022, supported by significant improvement in global trade, stabilized commodity prices, containment of the pandemic, and gradual improvement in consumer and business sentiments. This is anticipated to drive the growth of disposable income and consumer purchasing power, thereby spurring the demand for E&E products moving forward. Further, the consumer E&E retail industry will continue to be supported by several financial aids and incentives provided by the Government, including the extraordinary individual income tax relief on the purchase of handphones, laptops, and tablets, until 31 December 2022.
 
In the longer term, the demand for consumer E&E products in Malaysia is expected to remain strong as consumer E&E products are essential items for comfort and functional purposes to ease, simplify and improve our daily lives. The demand for consumer E&E products will also continue to be driven by the introduction of innovative consumer E&E products with enhanced functionality and features and the availability of multiple sales platforms that provide convenience and flexibility for the purchase of consumer E&E products.
 
*Data Source from SMITH ZANDER research company.
 

Business strategies and future plans

  • Enhance the customers’ shopping experience and strengthen the market presence by upgrading the chain of physical stores.
  • Expanding product portfolio through the development of a new brand distribution business which include international brands and the own house brand
  • Increase the warehouse storage space and strengthen the logistic network in East Malaysia.
  • Boost the digital infrastructure.
  • Enhancement of the PlusOne loyalty programme
 
 

QnA from management team

  1. Q: Can senheng give examples on how they utilize IoT and 5G to grow its business?
A: Currently there are many smart home devices, your refrigerator, your washer are all interconnected. When 5G is ready the T20 group of customers will start to use it just like 25 years ago when our house TV (big size TV), UHD and LCD launched. The market is very big, the same as 5G. Smart homes will move.
 
  1. Q: Is the 30% Dividend Policy for investors who hold SH Shares on yearly basis? Or is it just the first year?
A: We intend to distribute the 30% dividend every year if all the cash flow allows the company to distribute.
 
  1. Q: Could we understand how senheng plans to implement its pricing strategy moving forward maintaining healthy profitability while trying to keep prices manageable to customers and throughout their value chain?
A: All the product prices in our store ( SenQ, Senheng and even online or offline...) are the  same, to maintain good profitability the best way is to maintain, enhance, increase the topline mean the revenue so this is why the majority of our profit use to upgrade/ increase the new store of the company. 
The gross margin at FYE 2018 shows high because it is affected by the replacement of the GST to SST. Senheng's gross margin will be more firm in the future.
 
Chairman: We do compare prices in the market especially Lazada and Shopee and we use machines to compare all the prices. We have set a benchmark when any product price gap is more than 8% we will revise the price. (8% of the price is based on previous experience and price marketing). Senheng always provides value-added services, for example our extra warranty plan to our members. Other than that, clients are happy with Senheng when going paperless, we don't issue invoices, receipts, or documents. Everythings we push in the app's client can track back to a 7 years record under the apps. We don't use price to drive our business, we drive by value-added. Therefore Senheng product prices are always stable. 
 
  1. Q: How much has the recent Selangor flood improved/affected the sales of electric appliances?
A: Our operations are not much affected by this flood, however victims from this housing area and their E&E product are all gone. We receive a lot of corporate and NGO orders to come to buy from us to send to this housing area.
 
 
  1. Q: Will Senheng plan to invest in R&D to manufacture its branding of electrical and electronic products, for example, automation vacuum, and build your smart home appliances ecosystem just like Xiao Mi?
A: No, we will want to stay as retailers and focus on retailer business. 
 
 
  1. Q: With supply chain backlogs pushing up logistics costs and prolonged delivery times, any impact on SenHeng’s gross margin?
A: We think that all these shortages of raw material, shortage of chips, high cost of container and shipping are happening to everybody(all the brand makers and retailers). However, luckily we had moved to a bigger warehouse so we do not face any short supply issues or minimal short supply issues. Our supplier already informed us what SKU will be in shortage and we had also planned well to order the SKU. 
 
 
  1. Q: How do SH groups see yourself compared to Harvey Norman?
A: Harvey Norman mainly in the shopping mall, the location and, retail space are same as SenQ in the shopping mall but the differences here about retails, Senheng group retail berhad is combined with 2 brand SenQ contribute 40%-42% of our business, another portion is Senheng which contribute about 60% of our business. In terms of size, Harvey is not even half of our size. Second, talk about the customer segment Senheng covers around 60 -65% are Malay, SenQ are more Chinese. Third, Senheng has a fixed pricing strategy so when you walk into a Senheng store you do not need to compare the price, other than that we also offer an extra 1 year warranty to our Senheng members. All of this makes us very different from Harvey.
 
 
  1. Q: Has inflation come into play for SH and if so how do you foresee margins for 2022/2023?
A: So far, up to the whole financial year under FYE 2021 there is no material impact from inflation. The margin will not be impacted at all, on our side we will be more productive on the supply chain, in terms of how we solve our product until we deliver to our client. We believe our new brand "ROBAM" and "JIMMY" will bring better margin as we have cut all the middlemen and dealt directly with the supplier.
 
 
  1. Q: Will SH Group consider embarking on Mobile Sales Truck in rural areas for better reach? Especially Sabah and sarawak?
A: No but we will try to support ventures to the rural town but not mobile trucks because mobile trucks can show samples, but we still can't deliver the goods to them. We thought of that before but can't be executed, we want to help the rural residents.
 
 
  1. Q: If 5G comes, will the majority of Malaysians adopt smart home products or it’ll take longer.
A: I think it needs a longer time, it cannot be changed by everybody immediately. I believe the T20 consumer will change it first because they want to try. I think very soon, Malaysia will have no maid and at the moment the smart washing machine will move first because you are able to control when to wash, when to soap, when to spin in your office. A big change in the next 2 years. Our customer segment: T20 increasing;  M40 decreasing; B40 increasing
 

MQ Trader Views

Opportunities

  • Market Leader in the industry - Largest chain retailer of consumer electrical and electronic products in Malaysia
  • Advance digital infrastructure to support daily operations such as delivery management system, customer data collection, inventory management, etc.
  • Product diversification  - up to 10,000 SKUs from over 280 different brands.
  • The 5G and IoT concept would boost the sales of electrical and electronic devices in the future.
  • Exclude from concentrated customer risk - Senheng’s main customers are public therefore they won't be involved in any cancel order/swapping of main customer risk.

Risks

  • B2C method - e-commerce provides an environment where the primary manufacturer directly deals with the customer without a middleman. 
  • Low economic moat as the industry barriers are down and competitors are more easily involved in this market.
  • The company doesn’t plan to involve any research and development to design and manufacture their product.
 

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