Changing landscape of the retail industry
I was born in Malaysia in 1960 and have stayed, studied and worked here all my life. I am a Malaysian citizen by law - this constitutional right is not given by any living or non-living politician, academician or racist bigot.
Since Malaysia achieved independence in 1957, those born in Malaysia and naturalised citizens of all races have played a part in the economic development of this country. The nation’s rapid industrialisation was due to the hard work of responsible politicians, gung-ho entrepreneurs and diligent citizens who just wanted to build a better life for their families.
Capital was scarce in the 1960s. Fortunes were built by those who had access to capital, foreign companies (mostly British) which owned most of the plantation land and local entrepreneurs who pooled their capital to trade, manufacture and build houses. Citizens needed food, clothing and a roof over their heads as basic necessities. Thus, it was a demand economy with tremendous opportunities for yesteryear entrepreneurs.
When I was young, I remember that my family would purchase our groceries from the local grocery shop on credit, with the details of each purchase like the date and amount being written in a small 555 notebook - a long way from the computers of today. After receiving his meagre salary at the end of each month, my dad would pay the grocery bills just like any other creditor throughout the country. The grocers got their supplies on 90-120 days’ credit terms from the wholesalers, who, in turn, got 90-120 days’ credit from the importers who managed to arrange trade financing of 90-120 days from their bankers.
My early trading days were spent on arranging trade financing facilities, as I had to get my bankers to issue a letter of credit to purchase imported goods on 120-day trust receipts (30 days for shipping and 90-day for stock-keeping). Then, once the product was sold, there were another 90 days on average in accounts receivable. It was common then to work on a total trade financing of an average of six months for a single item purchased and sold.
The retail industry in Malaysia grew on a supply chain network used to working on long credit terms. As the retail formats evolved into air-conditioned supermarkets in the 1970s and 80s, consumers with better cash flows would buy their items in cash at the supermarkets. Because of the easy credit terms offered by suppliers, it was easy to open supermarkets and convenience stores with minimum capital, as the immediate cash flow generated by daily sales was used to finance the merchandise stocked on long credit terms.
My first lesson in managing credit risk was in 1985/86 when I started my trading business. The collapse of the Emporium Supermarket and Department chain stores with a debt of Rm290mil crippled the entire supply chain of grocery and clothing entrepreneurs. The well-financed suppliers withstood the write-offs, but thousands of SMES along the supply chain went bankrupt.
This practice of easy credit from suppliers continued into the 90s and only after the further collapse of local supermarkets and department stores like Super Komtar Group, etc, did the supply chain start to tighten credit policies with strict credit limits and a no payment-no supply policy. Managing credit risks is now a major concern even among SMES.
Most developers will achieve some sort of success, perhaps with about 50%-90% of sales between the launch of a project to completion of a project, which is defined as at the time of vacant possession.
While landbank is mostly funded by banks, the development of a project too is required to be funded via bridging facilities.
A developer will use three sources of funds to ensure the construction of the launch project goes on smoothly right up to completion. One is his own working capital, second is the progress payments that are received from buyers and third the bridging facilities from their banks. It all looks nice on paper but the problem effectively starts when a developer is not fully sold, especially for high rise development.
A developer that is involved in high-rise development may enter into serious cashflow issues if sales are weak. Assuming a developer foresees 20% gross profit margin for a high rise development. It is likely he may face cashflow issues if sales are 80% and below.
Logically, every unit that the developer sells is a profit to the developer but cashflow wise, the development will face cash crunch as the developer’s profits in the form of actual cash is actually stuck at the 20% or more of the unsold units, even after completion, in the form of inventories.
This is not so difficult for a developer who is a township developer involved mainly in landed properties as the developer could actually afford to launch in phases.
But for a high rise development, not achieving near 100% sales can lead to serious cashflow issues or worse, an abandoned project if the developer has exhausted all the means to complete the high rise development.
With the KLPI at its near 10-year low, the winners among these top developers are developers who have cheap landbanks, developers who are involved in township development, especially among the affordable market segment and with relatively below average net gearing level.
Table 1 (see page 8) shows the key financial statistics among the 12 property developers.
Trading at below 0.5x book value, this dozen property companies have indeed reached a valuation point that is rather inexpensive and perhaps warrant a good look for investors with appetite for risk, especially with a longer term horizon.
Hence, despite the challenging market environment in the property sector, the negative sentiment on the sector is likely overplayed and there is no reason for this twelve companies to trade at significant discount to their respective NAV or worse at multi-year lows.
The views expressed here are the own.
writer’s