One year since looking for great companies, moving away from Reits and SG blue chips, things are not looking good thanks to the trade war. On the this journey, my preference for stock picking is evolving and adapting to what I have learnt, read and experienced. What I thought on day 1 might have changed due to the Marco environment or the change in preference. As the trade war escalate, I decide to hold onto more cash and relook at my portfolio.
My concern with IGG is that with the trade war, if Apple lost it market share, the services that apps provide on IOS will lose its revenue. Services such as gaming will be affected more as the game saves may not be able to port to android. Even within android, the game saves has to be in the cloud. Losing the game saves, the gamer will lost the motivation to carry on the game, hence losing revenue. China market segment of IGG is about 28%, Apple Iphone Market share is about 15%. Another concern is 90% of revenue come from just one game. New games have been released. Let's see how the new games fare. There is growth for live streaming and YY Inc is undervalued. Market share eroded as well as margin due to intense competition. Just like Grab/Uber. Broadcaster will move to whatever platform that benefit them. YY Inc still has the largest market share and profitable growing net income. 75% owned by founder, he has much skin in the game.
Listed in 2012, Perfect Shape Medical started out as a beauty and slimming services in Hong Kong. The business has hence expanded into non-invasive medical beauty services and ventured into the China & Macau market. It also open up all in one mega centers as well as concept stores. However, the main operation is still in Hong Kong, contributing 60% of the company's revenue. Perfect Shape Medical is family owned, having 67.4% stake in the company.
Before the rise of technology gadgets and online space which men likes, the retail sectors is basically cater to the ladies, fashion, accessories and beauty services. The ladies like to have sets of clothes and accessories to have numerous kinds of combination for dressing up. I know friends/relatives who own X pairs of shoes/perfumes/makeup kit. Some go beyond that to make themselves pretty, and that is how the service from Perfect Shape Medical come into play.
The cost of goods of the business is very low, the gross margin is almost 100%! The business however require a lot expenes such as labour, rental and marketing.
Growth Factor Revenue grow at an astounding 14% CAGR. The Hong Kong business continue its strong grow as the business expands, the China & Macau market is just 40% of the total revenue. Looking at it geographically, China business should grow much bigger in the long term. The management is competent in managing the business. One example is that the number of service centers has been reduce from 50 to 33 in China yet the revenue is still growing. Cash Flow Machine Perfect Shape Medical has been paying out 100% of its earnings since 2013. How is that possible? I have to look at the cash flow. As we can see from the chart, 2013 and 2014, dividends is payout of earnings + cash in balance sheet. From 2015, the payout is lesser than the Adjusted FCF. From 2017, dividend payout is lesser than FCF. We know that is true as the cash in balance sheet is increasing year after year from the cash flow. Perfect Shape Medical has zero debts/borrowings. Hence the 100% payout dividend is substainable with cash left over for business operation and expansion. Free Cash Flow (FCF) = Operating Cashflow - CAPEX Adjusted FCF = Net Profit + Non-Cash items + Borrowings - CAPEX
Potential Spin Off Perfect Shape Medical has file for spin off for approval for its China & Macau business to be listed in China. Perfect Shape Medical will remain the controlling shareholder of the spin off entity. HKEX has approved but the management has not decided whether to proceed with it. As non China Citizens cannot acquire shares of the new entity through a spin off. Perfect Shape Medical may compensate its shareholder in other ways, else it is still a great business to own. Digital Platform & Big Data An intelligent team is set up to analyst customer's behavior by leveraging on their own membership database of their members. Research & reviewing latest trend around the world. Drive sales through online-to-offline. I am not so sure about this, i think it's buying the service through web or app and then use the service at the physical store. This also provide engagement between the company and the client. Business Risk The business is greatly affected by the economy. 2016-2017 period had weight down on the business. Perfect Shape Medical provide non-invasive beauty medical service, however if any incident occur and may cause damage to its branding, is a risk may or may not happen.
Business Moat As a pioneer in the industry, and branding power and the high start up cost is believe to be a moat by the management. Perfect Shape Medical focus to be always provide service that exceed customer's expectation has help to propel its business at such amazing growth.
In a customer prospective, if the service and product works well on me. I would stick to them long term and possible referral to friends and families. Human is a creature of habits, a change to different provider will cause frustration of things don't go well as expected or worst than the current one that is working fine as it is.
Conclusion One most important aspect of Perfect Shape Medical is that it recquire very little CAPEX to run the business, hence the great cash flow. I believe Perfect Shape Medical has potential to grow in Hong Kong as well as China which is a much larger market. With dividend payout at 100% of earnings and huge cash flow, total dividend for FY2019 may be at 0.242,current share price of 2.42 give 10% yield. The share price jumped 18% last Friday before I got the chance to make an analysis. I hope anchoring will not stop me from buying.
