Old Chang Kee Ltd: Transformation almost complete November 14, 2017

PSR Recommendation: BUYStatus: MaintainedTarget Price: SGD0.98
  • 1H18 revenue was in-line with expectation but earnings missed on costs pressures
  • New factory and equipment to provide new capacity to boost product innovations and margins from 3Q18 onwards
  • Declared an interim dividend of 1.50 cents per share, same as last year
  • Maintained ‘Buy’ with unchanged DCF-derived TP of S$0.98

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The positives

  • Strong performance from its retail outlets. Revenue from retail outlets +8.7% YoY in 1H18, driven by contribution from new outlets and higher same store sales growth.

During the past 12 months, the Group had closed two stores (at Golden Shoe Complex and Century Square) and opened two new stores (at Tampines Hub and Smart Energy Serangoon Petrol), bringing total store count in Singapore unchanged at 87.

  • Continue its store network expansion, locally and globally. The Group’s first flagship outlet in London, United Kingdom is targeted to open in 2018. While we do not expect the new revenue stream generated (with only 1 store) to contribute significantly to the Group’s bottom line, it will serve to uplift Old Chang Kee’s brand positioning in the global platform.

Meanwhile, we expect 3 net new stores in 3Q18. The Group has opened four new stores (at Wisma Atria, Changi Airport Terminal 4, Ang Mo Kio MRT, and Suntec City Mall) and has closed one store at One KM Mall, since Oct-17 till-date. We maintained our view that OCK’s store count would reach 92 by end-FY18.

The negatives

  • One-off disruptions during factory integration process in 2Q18
  • Slower puff innovations: Historically, new puffs are the key revenue growth driver. However, 1H18 puff sales only grew by 3.5% YoY, dragged by subdued 2Q18 puff sales. Nonetheless, puff products remained the major contributor to its revenue and accounted for c.32% of 1H18 Revenue vs 33% in 1H17.
  • Integration cost, coupled with higher raw material costs eroded gross margin. The factory test-runs for the commissioning of the Group’s new factory equipment is one-off in nature. Management shared that majority of the factory integration has been completed and is on track for full integration by 3Q18. On the other hand, management noted higher prices* for chicken meat, cooking oil and margarine during the period.

* Chicken and cooking oil prices increased c.5% and c.1% YoY respectively in the period (Source: CEIC)

Following the commissioning of new factory equipment, production has now stabilized with a higher production capacity and efficiency.

Outlook

Near term headwinds but positive on long-term outlook. New stores opening and product innovations will continue to drive topline growth. The Group is currently reviewing its pricing and promotional strategies. However, we do not expect FY18e gross margin to restore to the 63% level. Nonetheless, we are optimistic that the new factory will yield manufacturing efficiencies and new product offerings. 

Maintained Buy with unchanged DCF-derived TP of S$0.98

Successful integration with the adjacent new factory by 3Q18 would be the inflection point for OCK. We remain upbeat that its new factory facilities will increase capacity to fuel their expansion domestically and regionally.

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Profile photo of Soh Lin Sin

Soh Lin Sin
Investment Analyst
Phillip Securities Research Pte Ltd

Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.

She graduated with a Bachelor of Science in Mathematics and Economics from NTU.

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