My S.W.O.T Analysis for Chasen Holdings (5NV)

Introduction

It is not common for me to be writing on penny stocks like Chasen, but it caught my attention with its spike. I got curious and started looking for more information regarding it and found some interesting facts. Coincidentally, one of our readers dropped us an e-mail and requested for a write-up on Chasen! For starters, Chasen is trading at a price-to-book ratio of 0.2198. The threat of a value-trap is real, but its recent spike from 0.027 to 0.041 gives us some possible indication of interest and revival of the stock.

 

Strengths

-Nil-

Weaknesses

  1. Poor Net Profit Margins
  2. Outstanding Warrants

Poor Net Profit Margins

While Chasen has a decent gross profit margin of ~20%, this figure does not flow down to the bottom line as we see expenses eroding the net profit margins down to the negative regions. The management is very well aware of the problem but can do little to change that.

Eric J P Ng, Non-Executive Chairman mentioned that “margin was a casualty in the Group’s effort to retain market share.” and “increased pressure on the operating margin as workforce had to be maintained even as pace of work (hence revenue generation) slowed.” – 2016 Annual Report

Whether Chasen will be a viable long-term investment remains questionable as its net profit margins aren’t showing any clear signs of sustainable recovery into the positive region. The impact of this is felt as retained earnings went nowhere for the past 5 years.

Outstanding Warrants

Chasen has a lot of warrants. About 67% of the outstanding warrants is set to expire soon, 20 March 2017. While this will likely have no impact on share price because of the difference between current share price and exercise price, the ‘diluted EPS’ figure will be enhanced in next year’s (2017) annual report. The remaining 50m outstanding warrants that exercise 1-for-1, at 0.025 is in my opinion, disturbing.

Personally, I don’t like warrants because they kind of cap how much your share price can grow because of its dilutive nature and the fact that you know someone else is able to get the shares at a certain price. You wouldn’t want to pay more than that guy. With current share price at 0.041 and exercise price of 0.025, with an issue price of $0.010 for each warrant, holders of the warrant are already ‘in-the-money’ as they are able to exercise the warrants and sell off the shares at a profit of $0.006. The chance of dilution of Chasen shares has become real.

Opportunities

  1. Accounts Receivable – Could the worst be over?
  2. Working with Tesla
  3. Door-to-Door Delivery by CZE

Accounts Receivable – Could the worst be over?

From 2016 Annual Report, we see that “provisions for doubtful collectability of receivables from certain projects resulting in the announced loss before tax in excess of S$3 million.” This invariably led me to look into the age analysis of trade receivables. It is interesting to find that the worst could possibly be over for Chasen as debts “past due more than 90 days” typically are the ones that result in provisions for doubtful collectability of receivables.

In 2015, the concentration of accounts receivable past due more than 90 days posed significant risk of write-off. But in 2016, things are beginning to look better as the concentration is back to ‘Not past due’. That being said, I’m still feeling bugged about over $6.4m uncollectable, and I expect another round of provision for doubtful collectability of receivables to be made. After which, the collection of receivables for Chasen should begin to look cheery again!

Working With Tesla

One thing that caught my interest in 2016 Annual Report was this: “its maiden business, CSJ managed a relocation project for TESLA synergizing the resources of CLSG and Hi-Tech (Shanghai). This successful start gave the Group an opportunity to be considered for the next phase of the TESLA project”

To be able to work with TESLA is a big deal. While big companies typically squeeze margins from smaller companies like Chasen, we can at least be certain that they will pay up.

Door-to-Door Delivery by CZE

Chasen painted a very rosy picture in their annual report – “The key thrust of CZE’s new Thai operation is land freight or road trucking cargo from South-East Asia stretching all the way from Singapore into Indo-China and beyond. It can even link-up with the China promoted New Silk Road to freight cargo all the way to Russia and Western Europe by train.”

But the next two words were in my opinion, the most important. “If successful”. 

If indeed this could take off, Chasen has a lot of room for growth in terms of revenue, but we cannot ascertain the profit margins for such businesses, although I believe it to be quite thin.

Threats

Value Trap

Stocks are cheap for a reason – Most of the time. After it made a spectacular run-up in 2013 when it found its way onto Mainboard, shooting from $0.20 to a high of $0.43, everything went downhill from there. Whether or not will finally see its share price trading at its NAV of $0.1865, representing a potential 366% profit, is hard to say.

To entertain the thought is hard because of the various factors like negative net profit margins and depreciation which will keep eroding the NAV of Chasen. Should this persist, given time, NAV will keep declining.

Conclusion

Chasen is an asset play company. The company does not have any significant strengths or branding and lacks competitive advantage. However, the only plus point is that it is cheap when compared to its Net Asset Value. In view of its NAV and exercise price of warrants, I expect Chasen to trade up to a maximum of $0.1865(NAV) from $0.041, representing 366% upside within the year. Subsequent years should see the NAV continue to fall as depreciation erodes away its asset value.

Aloysius Lee

Aloysius has been investing in Singapore Equities from the age of 18 and is still madly enthusiastic about it. He strives to sharpen his edge while guiding others along the way to snowball their way to financial freedom!

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