MWG 2017 growth prospects uncertain

February 22, 2017 | 16:03
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In 2016, thanks to the growth of its revenue, profit, and the expansion of its operating network, Mobile World Investment Corporation (MWG) continuously reported record stock prices.

However, a saturated personal electronics market, which made up the bulk of MWG’s revenue and profit, raised questions about this year’s business.

Worrying signs

MWG is a leading consumer electronics retailer. By the end of November 2016, there were 938 The gioi Di dong and 211 Dien may XANH stores. Besides, MWG is making an entrance in the food retail industry with the Bach hoa XANH chain.

According to its released 2016 financial report, MWG recorded a net sales of VND44.613 trillion ($1.967 trillion), and after-tax profit of VND1.577 trillion ($69.53 million), increases of 77 and 47 per cent, respectively, compared to 2015. Its revenue also overtook the initial annual target by 14 per cent. Over the last five years, MWG’s revenue and after-tax profit have risen by 43.87 and 65.7 per cent a year on average.

Despite the sharp growth in revenue and profit, over the last two years, the amount of inventory, cost of goods sold, selling expenses, administrative expenses, goods rejected, and goods repurchase has increased not only in terms of absolute value but also in the proportion of each account over revenue.

Although there have not been any worrisome signals about these ratios, their rise should be controlled, otherwise they will become a significant burden to MWG’s revenue.

At the end of 2016, MWG’s long-term assets accounted for 16.8 per cent, with the largest portion of 64 per cent (VND9.500 trillion - $418.87 million) belonging to inventories. Generally, consumer electronics and electronic appliances inventories often go out of date quickly without an appropriate inventory policy.

MWG has a typical retailer asset structure as it does not depend on long-term borrowings. Instead, its owner’s equity can meet the need for long-term assets and a part of the additional working capital. During the period of 2012-2016, the average growth rate of owner’s equity was 40.3 per cent and the firm’s size also rose by 56 per cent per year on average. The percentage of liabilities in the capital structure was 74 per cent by the end of 2016 (56.44 per cent in 2014).

The high short-term debt as well as the low quick ratio has led to certain risks in capital flows. However, retailers retained some advantages from their high liquidity inventories, a large amount of positive operating cash flows, and not suffering appropriating funds from customers.

Along with mounting expenses, MWG’s returns on equity (ROE) and returns on assets (ROA) have also been on the decline since 2014, although the gross profit margin was still maintained over 15 per cent.

The decreasing operating efficiency ratios resulted from the high initial expenses of the stores which need time to enhance their efficiency. Thus, it is hoped that these ratios will recover after MWG finishes its expansion and focuses on improving its performance.

Challenging year ahead

MWG’s board of directors have released the 2017 business plan, targeting VND63.280 trillion ($2.79 trillion) in revenue and VND2.200 trillion ($97 million) in profit, which is equivalent to increases of 38.7 and 39.5 per cent, respectively, in comparison with 2016.

Consumer electronics distribution is the key contributor to MWG’s success. The gioi Di dong stores make up approximately 70 per cent of MWG’s sales and account for 38 per cent of its market share.

Nonetheless, after a strong growth period, it is forecasted that the consumer electronics market is saturated, especially in big cities, such as Hanoi and Ho Chi Minh City, which are also the company’s major markets. MWG can still increase its revenue due to a rising preference of strong brands over small outlets, however, it is difficult to maintain a high growth rate.

In the appliance distribution sector, through the Dien may XANH chain, MWG has recorded high growth rates of revenue and market share thanks to the rapidly increasing number of outlets.

According to market research and user experience research firm GFK Vietnam, the domestic appliancemarket is predicted to have the size of VND97 trillion ($4.28 trillion) in 2020, which is equivalent to a growth rate of 11.3 per cent in the period of 2016-2020. This signifies high potential to flourish in the future. MWG is targeting a 30 per cent market share by the end of 2017. This goal was 16-17 per cent only in 2016. MWG has determined that this will be its main growth driver in the next one or two years.

When the consumer electronics market is saturated, the chain of Bach hoa XANH shops, which was developed at the end of 2015, is hoped to become the new main growth driver. With the slogan of “fast and cheap,” the chain compete directly with other strong brands, like Coop Food or Vinmart+.

According to a newly released report from KIS Vietnam Securities Corporation, by December 2016, although the chain of Bach hoa XANH shops reached the revenue of VND1 billion ($44.1 thousand) per month in each shop, it still suffered losses, requiring more improvement from MWG.

Moreover, at the end of 2016, MWG’s website has been launched to sell almost all products of the firm. MWG aimed to turn into a Vietnam-version of Amazon to compete with Tiki, Lazada, Sendo, and other competitors, catching the leading online consumption trend. However, as it is a new business, the possibility of success is questionable.

With positive business results, MWG’s stock price has doubled in 2016, bringing MWG to the top enterprises with amarket capitalisation of over $1 billion. The company’s price per earnings ratio (P/E) is over 15, which is equivalent to the market P/E, but it is still highly appreciated in comparison with many other firms in the Vietnam retail industry.

Recently, Dragon Capital has become a major shareholder of MWG. The foreign ownership limit, the maximum percentage foreign investors are allowed to own, was maximised at 49 per cent.

MWG has no intention to raise this cap due to the manifold limitations in the retail sector over foreign investors, especially in opening new outlets. Thus, investors may not expect huge surprises in terms of foreign investment.

Many shareholders pegged high expectations on MWG, recognising the large room to enhance the efficiency of its new store chain and its strong operational capacity with an effective inventory control system. Nevertheless, as competition intensifies, it becomes increasingly difficult to improve operating efficiency next to maintaining positive growth rates and controlling expenses.

In the next general shareholders’ meeting, the primary expectations centre around the answer of MWG’s leadership to overcome these difficulties to reach the 2017 business targets.

MWG has set the goal of $10 billion in revenue by 2020. Chris Freund, general director of Mekong Capital, which currently holds a little over 7 per cent of MWG, said, “I do not think that it is a plausible target for a company of the scale of MWG to grow ten-fold in only five years. However, in the past ten years, the company has always met its targets earlier than it planned. MWG has changed its long-term vision three times since we first invested in it in 2007. I believe that the newest vision of MWG will bring the company a lot of growth in the coming years.”

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By By Trang Vu

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