• MYR2.08 FV based on 20x FY25F P/E. Post-listing, we think Well Chip Group is in for a period of good growth, powered by an increased stock of cash capital and aggressive but mindful store expansion, while supported by all-time high gold prices. The counter is also trading at a discount to its domestic peers despite commanding superior operating metrics. Its status as the largest pawnbroker in Johor also makes it an indirect proxy to economic development in the state.

• Twin engines to drive growth. Well Chip has earmarked MYR124m (or c.29% of FY23 outstanding receivables) from its IPO proceeds to be used as cash capital for its pawnbroking business, which can then be disbursed as pawn loans. Due to the higher-risk nature of pawn loans, the segment commands a lucrative gross margin of over 80%. Defaults from the pawnbroking segment can also be monetised relatively quickly through the sale of unredeemed pawns by the group’s retail trading arm. This segment, on the other hand, is poised to benefit from all-time high gold prices, allowing margin to expand.

• Store expansion for the next leg. Well Chip plans to open seven new pawnshops by end-2025 in Johor and Melaka, and it also has plans to expand into Negeri Sembilan further out. While new stores could take up to two years to breakeven, we think growth in the rest of the group’s store network could more than compensate, especially with the abovementioned increased cash capital availability. The group currently generates MYR9-10m in revenue and c.MYR3m in PBT per store, which are far greater than its domestic peers (Figure 3).

• Relative outperformer, but trading at a discount. On a revenue, PBT and receivables per store basis, Well Chip commands superior operating metrics compared to its domestic peers. This is likely attributable to Well Chip’s location in Johor (vs its peers which are primarily located in the more competitive Klang Valley), where it commands the highest pawnbroking market share of c.36%. Despite this, Well Chip is trading at 13x FY25F P/E, which we think is unjustified – its domestic peers are currently trading at a historical P/E of 21-35x.

• Earnings forecasts and valuation. We expect Well Chip to book a FY23-26F net profit CAGR of 21%, driven by steady growth in both its pawnbroking (store expansion, increased cash capital) and retail trading (pawnbroking growth, all-time high gold price) segments. Our FV of MYR2.08 is obtained from a FY25F P/E target of 20x, ie around the historical P/E of its cheapest peer. Our FV implies 35x FY23 P/E, ie at the top end of its peer range.

• Key risks include shortage of cash capital for disbursements, slower-than- expected store expansion and a downtrend in gold prices.

Source: RHB Research - 24 Oct 2024