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4 Things You Should Know About Choo Chiang Holdings Ltd’s Upcoming IPO

Credit: Simon Cunningham

There’s been a lack of initial public offerings (IPO) in Singapore’s stock market this year as compared to 2014, so the upcoming listing of Choo Chiang Holdings Ltd may be a welcome development for investors who are interested in checking out the latest that the stock market has to offer.

Here are four things about Choo Chiang’s IPO you might want to know.

1. The nitty-gritty

Choo Chiang’s main (and only two) shareholders, Lim Trust Pte. Ltd. and Rhodus Capital Limited, are looking to sell a total of 33.28 million shares (31.2 million will come from Lim Trust while 2.08 million will be from Rhodus Capital) in the IPO at S$0.35 each.

The company will not be issuing any new shares of itself in the listing exercise; in other words, this listing is solely for Lim Trust and Rhodus Capital to liquidate part of their holdings in Choo Chiang.

Lim Trust, which will hold 70% of Choo Chiang after the IPO exercise is done, is 90% held by Choo Chiang’s executive chairman and chief executive, Thomas Lim; the remaining 10% belongs to Choo Chiang’s executive director, Rocky Lim. Meanwhile, Rhodus Capital, which will retain a 14% stake in the company after the IPO, is an investment vehicle that currently has no connections to Choo Chiang. That said, one of Rhodus Capital’s owners, Wong Leon Keat, used to be a partner at an auditing firm that had audited certain aspects of Choo Chiang’s business from August 1991 to February 2015.

While there can be nothing wrong with insiders wanting to cash out of their stakes in a company, it’s worth noting that a firm needing capital to expand is generally seen as a healthier reason for an IPO. Investors might want to dig into the reason(s) for Thomas Lim and Rocky Lim’s decision to part with a chunk of their stakes in Choo Chiang.

With the sale of the 33.28 million shares, which represent 16% of Choo Chiang’s total share count of 208 million, Lim Trust and Rhodus Capital stand to receive net proceeds of S$10.65 million (net of all fees) collectively.

Of the 33.28 million shares on offer, only 1 million has been made available for the general public. The remaining 32.28 million shares will be sold via placements to select investors.

Applications for the IPO are already open and will close at 12 noon on 27 July 2015. Shares of the company will begin trading on the Catalist board at 9 am on 29 July.

2. Key business highlights

Choo Chiang, which has been in business for more than 20 years, currently has two main sources of revenue: 1) the retail and distribution of electrical products and accessories (think items like light switches, circuit breakers, ceiling fans, power tools, and more) at its nine retail branches scattered across Singapore; and 2) rental income from its 13 investment properties which have a collective market value of S$20.05 million as at 30 April 2015.

The company carries third-party brands – like Hager, Legrand, Schneider, MK, Philips, KDK and Bosch – as well as its own CCM and CRM brands at its retail stores.

Choo Chiang sees its business as being driven mainly by “general economic conditions” in Singapore and the level of activity in the construction and property markets. With that in mind, the company believes it has some strong tailwinds in the near future given that the average construction demand in Singapore is expected to fall between S$29 billion and S$36 billion in 2015 and S$27 billion and S$36 billion in 2016.

3. Choo Chiang’s financials

As is common with most IPO prospectuses, Choo Chiang’s provided financials for the firm for the last three years (2012 to 2014 in this case).

The picture here doesn’t look too pretty; over the past three years, Choo Chiang has been unable to grow its revenue, profit, and operating cash flow, as you can see in the chart below.

Choo Chiang's revenue, net income, and operating cash flow (OCF)

Source: Choo Chiang’s IPO prospectus

Besides the distinct lack of growth, there are also a number of potential areas of concern. First, Choo Chiang’s balance sheet is not the strongest around, given that it ended 2014 with S$5.4 million in total borrowings (including finance leases) and just S$3.3 million in cash.

Second, there’s the company’s rising inventory turnover days to consider. Choo Chiang ended 2012, 2013, and 2014 with inventory turnover days of 63, 91, and 109, respectively. Rising inventory turnover days can be a signal that the company’s finding it increasingly difficult for it to sell its inventory of goods in its retail stores.

According to Choo Chiang’s prospectus, the phenomenon of a growing inventory days “can be attributed to [the company] increasing its stock levels to be more competitive in meeting customer demands and requirements in an expeditious manner.” Management also believes that having a high level of inventory on hand allows the firm to shorten its delivery time to customers and hence maintain its competitive position.

But, high levels of inventory bring with it the risk of inventory obsolescence – and that can potentially lead to a painful event of a write-down of assets. This is also not a remote risk either, given that Choo Chiang had already experienced a significant allowance for inventory obsolescence of S$2.6 million in 2013 due to “certain slow-moving stocks.” Investors would have to keep an eye on Choo Chiang’s management’s skill in gauging the future demand for products from the company’s customers.

4. Dividend policy and valuation

With its listing, Choo Chiang has the intention to distribute not less than 30% of its net profit as dividends to its shareholders in both 2015 and 2016.

In its time as a private company, Choo Chiang had not been a stranger to dividends, seeing that it had paid S$4.8 million, S$7.45 million, and S$10.8 million as dividends to its then shareholders back in 2012, 2013, and 2014 respectively.

At its listing price of S$0.35, Choo Chiang is valued at 13.2 times its earnings per share (EPS) in 2014. It’s not an apples-to-apples comparison, but it’s useful for some context to note that the SDPR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – is trading at 13.4 times its trailing earnings.

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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 writer Chong Ser Jing doesn't own shares in any companies mentioned.