PCCS (6068) PCCS GROUP BHD enters the lucrative used car financing business
Ah, the hire purchase business. Think ORIX Auto Leasing (M) Sdn Bhd, GoldBell Equipment Sdn Bhd and ELK Desa Resources Bhd.
What do these three players have in common?
Well, they really enjoy good margins, and now, PCCS Group Bhd wants a piece of the pie.
Yesterday PCCS told Bursa that it was investing RM4mil to enter into the used car financing and insurance business.
In a filing, PCCS said that it had entered into a shareholder agreement with Justin See Kok Wah, for the purposes of establishing and operating the lucrative used four-wheeled vehicles financing and insurance business in Johor and Melaka.
The joint venture (JV) company shall be known as Southern Auto Capital Sdn Bhd, where its principal business shall be of used vehicles financing and insurance within Johor and Melaka. This JV company shall commence its business on May 1, 2021.
PCCS shall hold an 80% stake in the JV company with the RM4mil it is putting in. See shall hold the remaining 20% and put in capital of RM1mil.
Thus, the initial issued and paid-up capital of the JV Company shall be RM5mil.
“With the current enormous used car market especially private car transactions with 400,000 units in a year, the company expects positive contribution from the business within a year,” PCCS founder and group executive chairman Chan Choo Sing said.
So, how attractive is the used car financing and insurance business?
To get a better idea of the margins, let’s take a look at one of the listed hire purchase players – ELK-Desa Resources Bhd.
ELK-Desa's hire purchase financing division is spearheaded by its wholly-owned subsidiary, ELK-Desa Capital Sdn Bhd.
The company operates out of two branches – in Kuala Lumpur and in Klang, Selangor.
As a strategy to differentiate itself from other non-bank lenders, ELK-Desa's hire purchase business is centered on the small value used car sector, which is generally not an area of focus for the typical financial institution.
Financials wise, ELK Desa has been consistently delivering double digit profit margins over the last three years.
Between FY18 to FY20, it delivered net margins of 24.9%, 26.67% and 23.58% respectively.
However, ELK Desa has two business divisions, namely hire purchase financing and the furniture divisions.
So lets take a look JUST at ELK Desa’s hire purchase margin contribution in FY19 and FY20.
An example would be its FY19 and FY20 hire purchase division breakdown.
ELK Desa achieved revenue of RM104.67mil and profit before tax of RM45.99mil in FY20, meaning it enjoyed gross margins of 43.94%.
Meanwhile in FY19, it delivered profit before tax of RM42.85mil on the back of RM84,8mil in revenue, meaning it garnered gross margins of 50.47%.
Margins are pretty superb.
This is a rough guide of the sort of margins PCCS will be garnering for its hire purchase business.
PCCS has its FY21 year end in March 31, 2021. Thus, the hire purchase business should start contributing by this year end, or in FY22 onwards.
Justin See is a seasoned player in the used auto car industry
PCCS’ new business partner Justin See is a veteran in the automobile business and has been selling used cars since 1992.
As it is, See is the advisor of 365 Capital Sdn Bhd, a company principally engaged in the business of used cars financing.
He is also the founder and group managing director of Semanggat Anggun Group (SAG). As of today, SAG has already obtained the authorised dealership for car brands such as Honda, Toyota, Perodua, Proton, Ford and Mitsubishi among others.
Its quite clear now that PCCS is on a diversification path and is looking to reduce dependency for its garment manufacturing business.
PCCS manufactures for the likes of Puma, Decathlon and Li Ning.
In one of the first signs that the company was looking to diversify, PCCS entered into an MOU with Shanghai Shenqi Medical Co Ltd to open up and develop the markets of Cardiology related products in Asia Pacific countries, on. Dec 15, 2020
Presently, the garment business contributes some 80% of its topline, but margins are razor thin.
Financials wise, PCCS is healthy, with cash of RM59.83mil as of Dec 31, 2020. It is trading at a historical price earnings ratio of 18 times, and has a current dividend yield of some 1.8%.
At its last price of 55.5 sen, the company has a market capitalisation of RM118.12mil.
It will be interesting to see how big PCCS intends to grow its hire purchase business moving forward.