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The Battle Of The Pawnbrokers

ChinesePawnbrokerSymbolHot on the heels of its 2 competitors, ValueMax Group (SGX: T6I) has become the third pawnbroker to list in Singapore after Maxi-Cash (SGX: 5UF) and MoneyMax (SGX: 5WJ). Shares of ValueMax jumped around 17% in its trading debut on Oct 30 from its IPO price of S$0.51 while the company said its offering of 138 million shares was around 6.3 times subscribed.

The 3 players in the burgeoning pawnbroking industry have all closed above their IPO prices at the time of writing, signalling strong investor interest in the local burgeoning pawnbroking industry. This has also led to growing analyst coverage which could drive share prices further.

The question remains: How will the pawnbroker industry turn out as the battle heats up? We take a deeper look at this issue below.

Revolution of the Pawnbroking Industry

Faced with rising living costs and tighter credit, there are an increasing number of people who are turning to pawnshops as families feel the squeeze from ballooning household and consumer debt. The advantage of no requirement for credit checks or proof of salary, on top of fast processing time, are important factors why people turn to pawnbrokers instead of banks when they are in need of quick cash.

Today’s pawnshop businesses have shifted away from intimidating shop-fronts with metal bars to sport modern-looking stores that are gaining favour with both younger consumers and investors alike.

In order to capture a bigger slice of the market, established pawnbroker chains have started to reduce their commission rates. This has also prompted smaller players, usually 1 to 2 family-owned pawnbrokers, to follow suit amidst intensifying competition.

Growth in Retailing and Trading of pre-owned jewellery

goldgoldRising prices for gold in the past two years have fuelled the gold rush where people take the opportunity to cash in the value of their family jewellery or purchase gold-plated jewellery for both speculation and the social status.

In Singapore, about 70% of items pawned at the 200 pawn outlets island-wide are gold. “People are saying ‘the gold price looks good, let’s pawn grandma’s gold chain and get it back next month’,” says Mr Song Seng Wun, an economist at CIMB bank.

As a result, the increased transactions have led to higher profits for the whole industry as a whole. This is evident from the positive growth in earnings from the 3 listed players according to their reports.

Increased Social Acceptance

There is also growing acceptance of pawnbroking amongst Singapore consumers as the number of pawnbrokers in Singapore have increased in the last two years from 175 pawnbrokers in 2011 to 200 pawnbrokers as at 1 September 2013.

In addition, consumers are mortgaging items that they already own, and monetising personal assets do not increase household debt. Thus, people are seeing pawnbroking as another alternative means to secure short term, secured financing.

There is also a misconception that the types of people who use pawnbrokers are only the financially stretched. There are also middle- or higher-income people in Singapore, who are cash-strapped due to their businesses’ short term woes, who pawn their gold bars or Rolex watches for rolling over purposes. These items can typically command up to 60% of their purchase price in cash.

Foolish Bottom Line

The underlying fundamentals mentioned above seem to indicate that the pawnbroking industry is expected to continue growing in conjunction with the rising costs in Singapore. This phenomenon of pawning items for cash looks to become more prevalent amongst the sandwiched middle class.

Some might feel that the market is soon reaching saturation point, citing examples such as the neighbourhood town centre of Ang Mo Kio, where 3 of the biggest pawnbrokers are situated within close distance of each other.

Investors interested in this industry should look at every firm, and value it in its own merit.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.