Posted by calvintaneng > 2019-06-09 08:35 | Report Abuse

Good and thorough writeup. Thumbs up.

For today also visit www.chick.com

Btw.

Banks do put cash collecting and dispensing in petrol stations, shopping complex or places where there is heavy footfalls. As space will be limited and rent going up it will be cost effective to install one rather than 2 if one can do the job of 2

Posted by teoct > 2019-06-09 09:51 | Report Abuse

Morning Jon, thank you for this sharing.

One question, what is your timeline for your forecast, one year, five years?

Posted by Choivo Capital > 2019-06-09 10:52 | Report Abuse

teoct,

i expect 5 years for or so for complete conversion for all non crm to crm's.

Posted by Choivo Capital > 2019-06-09 11:00 | Report Abuse

Another potential risk is

https://www.socash.io/

But i dont really see how it will become the norm.

Posted by teoct > 2019-06-09 11:12 | Report Abuse

Sorry, i meant timeline for your prediction on the share price.

Posted by Choivo Capital > 2019-06-09 11:14 | Report Abuse

No idea.

Do note its not a target price, its the range of values i consider the company to be worth today.


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Posted by teoct > Jun 9, 2019 11:12 AM | Report Abuse

Sorry, i meant timeline for your prediction on the share price.

Posted by teoct > 2019-06-09 11:23 | Report Abuse

There are currently more and more entities joining the e-wallet race. Eventually there will be a shake out.

Personally, will eventually use it as looking for change is most annoying and I am from the dinosaur age.

Reason why in China, Alipay and the others have not charge for the terminal and transaction fee is because they earn interest on the float (that is before money is credited to the merchant accounts). China central bank is proposing changes to this as technically the float money belong to the many merchants. And also the many users balance, no interest paid (unlike banks saving accounts).

I am not sure of Bank Negara rules on this.

Posted by abang_misai > 2019-06-09 12:32 | Report Abuse

sounds desperate

Posted by Choivo Capital > 2019-06-09 12:44 | Report Abuse

Short Sell loh.

I must be the first person to write a "Long Article" while telling you potential downside 20%.

Manage to get out of dayang?

Posted by bursadiary > 2019-06-09 13:08 | Report Abuse

Very conservative valuation!!

Why?
1. CRM sales are material starting only in 2014 and peaking in 2015 until 2018 (see table ESM revenue >RM50m)!!
2. Opensys provides 3 year free maintenance period. It means maintenance profit started only in 2017!! (see table SSS margin)
3. Maintenance profit margin is north of 80%!! Just ask any software maintenance guys. There is almost zero cost. Majority fixed labor cost.
4. PE ratio should >15x because earnings growth potential >30% for next 3 years and recurring income is >80% of profit!!
5. Free cash flow > net profit. Very little capex for a software business. Some value in property bought few years back!!

Opensys is easily worth >RM300m market cap (<RM100m today)!! When profit double in 2 years, it will start to attract attention!! People are fixated on e-wallet today because of free cashback!! Cash is king!!

Posted by supersaiyan3 > 2019-06-09 13:47 | Report Abuse

Good Analysis.

Personally I think the machines are not very user friendly, spit out money over and over again. (In fact I think Diebold has the best performance in that regards). But that probably doesn't matter as banks only look after their own interest.

In China, CRMs are horrible (as bad as their banking service). Their CRM gives you fake money because the machines cannot recognise fake money when it was deposited. If that happens in Malaysia, nobody would want to use CRM.

Posted by Choivo Capital > 2019-06-09 14:03 | Report Abuse

Interesting, thanks. I didn't know that about china.

From an investment perspective, the keep spit out money thing is probably a plus, since it really helps with keeping out the fake notes.

I'm assuming Diebold is also just as effective at that, but more effective at identifying old notes vs fake notes? I never thought to test like that as i don't think it affects the economics of the business. Still its interesting to know.

Posted by (US/CHN trade war doesn't matter) Philip > 2019-06-09 14:54 | Report Abuse

Actually one interesting point which I am trying to figure out. Opensys does not do their own R&D for these machines, and it is instead a licensed technology from OKI, Japan. The question which I could not clear up the answer to is:

1) what is the terms of the technology partnership. Is it a profit sharing deal, or just a pure franchiser/franchisee deal where OKI sets the master price and opensys sells based on the listed price to customers. What is the minimum stocks level to keep, will the system buying costs erode/increase over time, and most importantly is opensys working on their own homegrown solution in the future to compete with fintech and peers.

2) it seems your assumption of profits here are all based on pure sales only ( correct me if I am wrong). But another part of opensys sales is also based on leasing of machines as banks I believe will be far more interested in short term 1-3 year leases of the esm equipment at a higher service price, but without the hassle of buying and storing the equipment. For opensys looking at note 14 of inventory there is write down of used machines, as these machines cannot be cannibalised for new equipment or reused for other applications. There is a 10,313,089 write off of esm equipment which I assume is the leasing part of equipment that has been obsolete/ revamped. As OKI does not have a policy of taking back old machines and refurbishing I believe the difference in service actual profits will be quite substantial, as I am taking the example of my office leasing the latest xerox photocopy machine for a 3 year contract and returning it after the lease is up for a newer model, which is cheaper than buying a new machine.

In the end what will be the market size of this industry, what will be the acceptable method for it's main customer base ( fintech, direct purchase and ownership, leasing) and how clear will be the profit and revenue growth 5-10 years from now are frankly speaking quite murky for me.

I would say it is not a bad business, but neither will I submit capital into such an endeavor. Opensys has a huge market share 80%, but in a space where the total addressable market is very small. The customer base is also very niche, which is worrying all the same as some believe opensys is worth 300+ million.

Time will tell.

Posted by Choivo Capital > 2019-06-09 15:39 | Report Abuse

Fair points phillip.

I dont think they lease machines, more like receive payment for each transaction, when it comes to the kiosk and cheques. Look at the revenue note, they dont state any lease/rental income.

I'm fine with the write offs. You see the big ones in PPE note, however, i noticed that they are mostly fully depreciated to begin with. The adjustment amounts to only about 24% of current year depreciation, so an error rate of about 2-3% per annum on a straight line basis, relatively normal.

I do however, find it odd that they disclosed the write off in inventory. Probably need to find out.

Having said that, if we perform a valuation where every division except for CRM contributes zero, ie, we only take into account CRM SSS net profit, and included the discounted net profit from CRM sale, we are still looking at intrinsic value per share of around 40 to 50 plus cents.

Pretty good, but not utterly amazing, which is why its a relatively small 6.5% position.

You may want to take a look at kraft heinz and intel.

Posted by qqq3 > 2019-06-09 18:10 | Report Abuse

are there really outside fund managers in such propositions?

Posted by (US/CHN trade war doesn't matter) Philip > 2019-06-09 18:24 | Report Abuse

The intrinsic value is based on a proposition that trajectories will stay current. I guess the big puzzle is to always understand if any slowdown in growth is permanent or temporary. Opensys already had a drop-off in machines sales in the latest annual report.

The usual mathematical assumption is
If 1 bottle of beer is sold at $1, then 100 bottles of beer is $100.
But in the real world if you went to the market to buy 100 bottles the price is more likely to be $90. A bigger bulk discount. As different modes of payments compete, I believe most banks will choose the option the involves the lowest cost of maintenance and financial expenses.

I believe based on slower than expected contribution over a longer period of time than expected, inclusive of increasing costs, exchange rates and competition, you will be be closer to a intrinsic value per share of 19 to 25 cents. Using your crm projection based on projected sales. But again this is projection as I am more conservative on the real number of CRM upgrades, replacements and it's maintenance in the long term.

In my opinion, the dividend payout will not match the earnings growth in the long run, as the earnings and revenue of the latest quarter will not match the expectations of further growth as expected.

It is the age old question, give out dividends now and sacrifice future growth, or withhold dividends so earnings growth can match future expectations.

It is like asking people in the 50's if credit card will ever take off, everyone believed then that credit card fraud will be it's downfall. If you told them visa would process 11 trillion dollars in payment volume in 2018 it would boggle their mind.

My personal opinion is that fintech will be a booming monstrosity, and as usage becomes more prevalent, there will be less and less OTC transactions and machine cash applications in the future. I can't remember the last time I carried a 1000 ringgit note, much less bringing the 10,000 singapore dollar note around.

I believe cash will definitely have it's place in the future, but ATM, CRM usage will definitely drop as cashless payments become more secure and easy to use.

Lightning always finds the path of least resistance to earth.

Posted by Choivo Capital > 2019-06-09 18:35 | Report Abuse

In terms of value, electronic have far far exceed cash.

I have never carried a 1000 or 10000 sgd note out before, usually i ask them bring it to my house.

However, i think almost all of us here, visit the ATM once or twice a month at minimum. And assuming you do go out to eat, you will be spending cash.

You buy durian from uncle on the street? Cash.

Why don't i think e-wallets will make it in malaysia? Its simple. The economics dont make sense. You can't make money from e-wallets.

Why do shops accept e-wallets now? Because e-wallets are paying out subsidies to attract them, giving discounts on the vendor's goods to their customers, paid out of their own pocket.

Of course i'll help you as a vendor.

But if the economics become, i will charge the vendor 0.1%-2% when they receive payment, and due to BNM ruling as well as the fact customers wont want to swallow this, the vendor cannot pass on this cost, will i accept card or accept cash?

Unless you run incredible cash volumes, it would not make sense to rent the terminal and pay the 0.1-2% per transaction.

At the end of the day, the sheer fact is that this service is not free (and cannot be free due to economic reasons), unlike alipay in china, it will be unlikely become the mainstay, at least in terms of transaction volume.

Posted by qqq3 > 2019-06-09 18:38 | Report Abuse

they make money or lose money.....who cares? makes any difference to dividends?

this kind of business, one year make, one year lose.

this is at best a family kind of business , marketing agent of MNC.

Posted by qqq3 > 2019-06-09 18:43 | Report Abuse

landscape, technology, market leaders, competitions changes over night....no point.

Posted by qqq3 > 2019-06-09 18:51 | Report Abuse

fund managers prefer some thing more solid, preferably large accessible markets, own technologies, repeatable businesses, continuous improvements, sustainable and predictable.

Posted by qqq3 > 2019-06-09 18:53 | Report Abuse

by the way, traders like me may be interested if there is a reason to trade the share.............is there one?

Posted by qqq3 > 2019-06-09 19:03 | Report Abuse

before that there is Dataprep and its Lityan Systems...where is Dataprep and its ATM systems now?? started with a lot of promises....same kind of business.

market cap $ 90 million looks low....but there are reasons why so low.

Posted by Choivo Capital > 2019-06-09 21:34 | Report Abuse

Well, opensys have captured 80% of the market now for CRM and in cheques, they hold 85% of the market.

I think they can get the bulk of the market, esp since no bank is a fan of maintaining two systems. Think of it, when a company buy IT equipment, they just all whack dell, or apple etc

Paynet has been around since 2014.

It would be interesting if banks were to allow instant transfer at zero cost instead of debit cards.

But why do so? Debit card transactions is about RM21 billion this year or about 150 million transactions for malaysia. Rates of debit card is lower of 0.21% or RM0.70 +0.01%.

For simplicity, lets just use the 0.21%. That is about RM44.1 million raked in from fees, basically free money.

For the record, that amount is more than triple the total amount of profit from the maintaining ALL ATM's (CRM etc) in malaysia (based on my working above). Its about double the revenue from maintenance services for ATM.

Lets not even talk about credit card.

Nobody is going to shoot their own RM44.1mil free money ricebowl.

Posted by (US/CHN trade war doesn't matter) Philip > 2019-06-10 06:45 | Report Abuse

True story, I bought durians in tangkak using alipay.

Posted by Heavenly PUNTER Lynas Boleh > 2019-06-10 07:58 | Report Abuse

choivo living in his own sweet world

Posted by (US/CHN trade war doesn't matter) Philip > 2019-06-10 09:19 | Report Abuse

http://www.xinhuanet.com/english/2018-08/18/c_137399728.htm

This durian seller is using alipay and wechat to receive payment from tourists.

The convenience for tourists and for himself in not needing to hold can that can be stolen by thieves is definitely a boon.

Posted by qqq3 > 2019-06-10 17:29 | Report Abuse

investing is participating in its growth...................market growing?

market share growing ? 80% already.

Posted by Heavenly PUNTER Lynas Boleh > 2019-06-10 17:45 | Report Abuse

some people like shrinking market

Posted by qqq3 > 2019-06-10 19:09 | Report Abuse

value investors have under performed all other investors long long time already.

Posted by equitydiary > 2019-06-10 21:19 | Report Abuse

Should emphasize more on the maintenance income from CRMs which is recurring and growing. When I discuss about Opensys, most people think it's all about sales. As in the company sells a CRM and gets money, don't sell no money. What they don't get is that every CRM that Opensys sells will generate maintenance income. Opensys gives free maintenance for 3yrs. After 3yrs, Opensys charges about RM6k per machine per year. For those going for the AGM this week, can confirm with the company.

Posted by skyea > 2019-06-11 02:05 | Report Abuse

u know this maintenance revenue thing, its like palm oil trees reaching maturity, first u have 700 machines contributing, next its 1400, then 2100, 2800 and 3500 trees generating cash for opensys, the revenue curve will go up year after year, and so will the profit curve. but now heres wwhere it gets exciting, the number of staff will hardly increase, because for 3 years when machines were under warranty, they already had to be maintained "for free" the workforce structure is already in place to support this 3200 machines, meaning after 3 years, the revenue kicks in but costs dont go up. (because no new hires are needed) every rm 1 in revenue flows directly to the bottom line, if 19 mil rev comes in and no increase in costs, the company should get close to 14-15m in PAfter tax. that is 200-300% what it is earning now.

Posted by equitydiary > 2019-06-11 11:48 | Report Abuse

Well said