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Golden Resources (GRD) is GRD is a principal importer, wholesaler and marketer of rice in Hong Kong, and this is a stable but boring business. At first look, Company looks like it is a HK rice importer from Thailand, etc. However, more than 50% of its revenue actually comes from leading Convenience store chain in Vietnam (54% revenue contribution in 2020E) which has been compounding more than 25% CAGR while reducing losses. It’s revenue at Company’s cash & investment property has reached 70% of it’s market cap (taking out operating lease as debt, it is still 40% of market cap) which implies that the downside is limited. Rice business alone generates around CNY60M OP on normalized basis which means that giving it 10x would explain the overall market cap. HOWEVER, THIS IS ONLY THE TIP OF THE ICEBERG AS THE CURRENT VALUATION TOTALLY DISREGARDS THE NO.1 VIETNAM CONVENIENCE STORE (VIETNAM), CIRCLE K, WHICH THE LISTCO OWNS 100%.
Given that CVS division is making a loss now coupled with the fact that it has a legacy business (rice wholesaler) has punished the company valuation towards extremely cheap levels.
WHY INVEST NOW?
CIRCLE K VIETNAM IS THE no.1 leading convenience retail chain in Vietnam and this format is quite different from the very popular Vinmart + as the latter is more like a little supermarket which sells groceries also.
1. According to our penetration analysis, Vietnam CVS industry revenue should grow > 30% in the next five years, as it has among the lowest penetration ( CVS stores per capita) in the world. For instance, one store serves 69,000 people versus Korea 1,835 people, Japan (2,247), Phillipine (37,000). So, the growth trajectory is significantly huge and As GDP per capita grows, I believe CVS industry revenue should continue to grow > 30% / year.
a. Q growth: Company has already 393 stores now and Company expects to expand towards 500~700 stores by 2023. Also, according to CEO interview, he is planning to start franchising (which has lower invested capital vs. self owned and also higher profit margins) once store # crosses the 500 mark.
b. P growth: Also note that revenue per store in Vietnam is still much lower than that of the developed markets.
2. Competition is abating: Many other players, especially Japanese CVS players are facing difficulty expanding in Vietnam as they are facing difficulty localizing. Hence, we are seeing rapid contraction of # of stores here and Corona virus should help kick out marginal players. On the other hand, Circle K continues to expand via # of stores / sales per store growth. Company ranks no.1 in terms of customer perception & also ranks no.1 when you look up goog trend (vietnam) comparing data with FamilyMart, GS25, others.
3. Quick valuation: If we value the company using market cap per store (comparing to peers in Thailand, Philippines, Japan, Korea), company could easily be 2x~3x current market cap simply assuming # of stores will stay constant. Now, should the company expand to over 3,000 stores in Philippines (such as Philippine Seven) or more than 13,000 stores (such GSR in Korea), then company could be > 10x bagger in the next few years.
4. EArning outlook: I think the company could compound it's OP by 36% / year given strong turnaround in the Vietnam CVS business. Outlook could improve further if you assume that company could start franchising in 2021~22.
Key catalysts:
1. Company very close to breakeven according to our interviews with CVS owners (once over 300 stores, companies are close to breakeven). Also company reported positive EBITDA for the first time for the convenience store division. Given that the larger the scale, better pricing power vs. suppliers, we believe margins should continue to improve and finally be EBIT positive next year.
2. Companies like these could be strong M&A targets given the growth of the industry and competition abating (which could lead to higher ROIC and FCF). On Jan this year, Vietnam's leading minimart store (similar to Convenience store but lower quality stores) owner Vinmart was sold to Masan group. What is super interesting is that the valuation per store was a whopping US$1.2mn.!. Once we apply this to the SOTP valuation fo Golden Resource Development, this is 120% upside to current price & also assuming 0 value to the HK rice division!! If we assume ofcourse that the company continues to increase # of stores at a fast pace, we can assume a much higher valuation.
This is one of the powerful ideas I have faced within years.
Safe trading!
Given that CVS division is making a loss now coupled with the fact that it has a legacy business (rice wholesaler) has punished the company valuation towards extremely cheap levels.
WHY INVEST NOW?
CIRCLE K VIETNAM IS THE no.1 leading convenience retail chain in Vietnam and this format is quite different from the very popular Vinmart + as the latter is more like a little supermarket which sells groceries also.
1. According to our penetration analysis, Vietnam CVS industry revenue should grow > 30% in the next five years, as it has among the lowest penetration ( CVS stores per capita) in the world. For instance, one store serves 69,000 people versus Korea 1,835 people, Japan (2,247), Phillipine (37,000). So, the growth trajectory is significantly huge and As GDP per capita grows, I believe CVS industry revenue should continue to grow > 30% / year.
a. Q growth: Company has already 393 stores now and Company expects to expand towards 500~700 stores by 2023. Also, according to CEO interview, he is planning to start franchising (which has lower invested capital vs. self owned and also higher profit margins) once store # crosses the 500 mark.
b. P growth: Also note that revenue per store in Vietnam is still much lower than that of the developed markets.
2. Competition is abating: Many other players, especially Japanese CVS players are facing difficulty expanding in Vietnam as they are facing difficulty localizing. Hence, we are seeing rapid contraction of # of stores here and Corona virus should help kick out marginal players. On the other hand, Circle K continues to expand via # of stores / sales per store growth. Company ranks no.1 in terms of customer perception & also ranks no.1 when you look up goog trend (vietnam) comparing data with FamilyMart, GS25, others.
3. Quick valuation: If we value the company using market cap per store (comparing to peers in Thailand, Philippines, Japan, Korea), company could easily be 2x~3x current market cap simply assuming # of stores will stay constant. Now, should the company expand to over 3,000 stores in Philippines (such as Philippine Seven) or more than 13,000 stores (such GSR in Korea), then company could be > 10x bagger in the next few years.
4. EArning outlook: I think the company could compound it's OP by 36% / year given strong turnaround in the Vietnam CVS business. Outlook could improve further if you assume that company could start franchising in 2021~22.
Key catalysts:
1. Company very close to breakeven according to our interviews with CVS owners (once over 300 stores, companies are close to breakeven). Also company reported positive EBITDA for the first time for the convenience store division. Given that the larger the scale, better pricing power vs. suppliers, we believe margins should continue to improve and finally be EBIT positive next year.
2. Companies like these could be strong M&A targets given the growth of the industry and competition abating (which could lead to higher ROIC and FCF). On Jan this year, Vietnam's leading minimart store (similar to Convenience store but lower quality stores) owner Vinmart was sold to Masan group. What is super interesting is that the valuation per store was a whopping US$1.2mn.!. Once we apply this to the SOTP valuation fo Golden Resource Development, this is 120% upside to current price & also assuming 0 value to the HK rice division!! If we assume ofcourse that the company continues to increase # of stores at a fast pace, we can assume a much higher valuation.
This is one of the powerful ideas I have faced within years.
Safe trading!