WE ATTENDED Asia Enterprise’s inaugural Shareholder’s Day to understand more about its business and outlook. Managing Director Yvonne Lee started the session by sharing more about the company’s value proposition.
Father-daughter team at Asia Enterprises: Executive chairman Lee Choon Bok and MD Yvonne Lee. Photo: annual reportThe company sits between steel mills and end users of steel. Steel mills usually produce steel parts in large quantities. They also have long lead times which, in conjunction, make it prohibitive for users of steel to order directly from steel mills.
An example given was that of a ship builder which requires many different steel parts in varying quantities in order to build a ship.
It would not be feasible for the ship builder to order each part from different steel mills given the coordination required and the minimum quantity order required. Instead, the ship builder can get all its materials directly from Asia Enterprise and with a shorter delivery time.
Asia Enterprise’s 3 core principles
The management is guided by 3 core principles:
1) Don’t buy what they can’t sell
2) Don’t borrow what they can’t return
3) Don’t sell to people who they don’t think can pay them back
These illustrate management’s awareness in terms of managing obsolescence risk, degree of financial leverage and bad debt management.
The business requires $5 of capital for every $1 of sales
Most of us know that the steel stockist business is a very capital intensive one. But just how capital intensive? $1 is required to purchase inventory from steel mills. Another dollar of inventory is under delivery from suppliers. Meanwhile, a dollar of inventory is required due to the long delivery lead time from suppliers and another dollar of inventory is en route to customers. Credit terms are also usually offered to customers, so that’s another dollar in receivables. However, the capital intensiveness of the business also deters potential entrants from the industry.
Down cycle an opportunity for upgrading
Steel prices have declined drastically due to an oversupply from China and China’s economic slowdown. Fewer inventories are required to be held during such down cycles and management has taken the opportunity to redevelop one of its warehouses by housing its entire inventory in its other two warehouses. With its strong balance sheet, management is confident of riding out the down cycle as it has done on numerous occasions in its 40 year history.
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Implied Price-to-Book of 0.08x, net of cash. In addition, the company has paid dividends for every of the 10 years that it has been listed. One concern we have would be the recent regulatory changes by SGX. By forcing share consolidations which reduces liquidity, it will result in an erosion of shareholder’s value. This is especially relevant for Asia Enterprises as its stock price currently borders around the SGD0.20 mark. |
This article was recently published on Value Edge and is republished with permission. Yeo Sui Chuan (left) has been featured in the Sunday Times and the Business Times' Young Investor.
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