Fundamental Analysis of Padini Holdings Berhad by L. C. Chong https://lcchong.wordpress.com/ https://www.facebook.com/groups/285121298359919/

1. PADINI
FUNDAMENTAL ANALYSIS
Financial Year 2015 (30 Jun 2015)
L. C. Chong
1 December 2015

2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
Stock analysis in this presentation may not neutral because I have incorporated my
risk appetite and principles in the analysis.
All figures in MYR and in '000s, except per share data
2

3. DECLARATION OF INTEREST
• At the time of writing, I owned shares of PADINI.

4. KEEP IN TOUCH
http://lcchong.wordpress.com
https://goo.gl/jjkq4P

5. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.

6. CHANGES
• 6 Nov 2015 – First write up of PADINI in PowerPoint format

7. REFERENCES
• Apparels (KLSE) – Peer Comparison

8. BUSINESS PROFILE
• Principally engaged in the garment industry in Malaysia
• Distributes and retails adult’s garments, children’s garments, ancillary products,
maternity wear, ladies’ shoes, bags, belts and other accessories
• Distributes its products through its free-standing stores, franchised outlets and
consignment counters, which are located in local and oversea markets.

9. BUSINESS PROFILE (CONT.)
• Its products are distributed under the brand name of Vincci, Vincci+, Vincci
Accessories, Tizio, Padini Authentics, PDI, Padini, Seed, Miki, and P&Co, all of which
are owned by the Group except the Tizio label
• PADINI also utilises a number of lesser known house brands to market the
merchandise that it offers for sale in its Brands Outlet stores.

10. BUSINESS PROFILE (CONT.)
• Five reportable segments, which are determined by each of its subsidiaries
Companies Brands
Vincci Ladies’ Specialties Centre
Sdn. Bhd. (“Vincci”)
Tizio, Vincci, and Vincci
Accessories
Padini Corporation Sdn. Bhd.
(“Padini Corporation”)
Padini, Padini Authentics and
PDI
Seed Corporation Sdn. Bhd.
(“Seed”)
Seed and Seed café
Yee Fong Hung (Malaysia)
Sendirian Berhad (“Yee Fong
Hung”)
Brands Outlet and P&Co
Mikihouse Children’s Wear Sdn.
Bhd. (“Miki”)
Miki Kids

11. OWNERSHIP SUMMARY
INDIVIDUALS/INSIDERS
49%
INSTITUTIONS
30%
PUBLIC AND OTHER
21%

12. TOP 5 SHAREHOLDERS
PANG CHAUN YONG
76%
SOMERSET CAPITAL
MANAGEMENT LLP
7%
SAMARANG LLP
7%
CAPITAL DYNAMICS ASSET
MANAGEMENT SDN BHD
5%
MIN YANG THIAN
5%

13. OWNERSHIP ANALYSIS
• PADINI mainly owned by individuals like Yong Pang Chaun and Min Yang Thian, but
institutional funds owned 27% of PADINI
• Yong has been and still is the driving force of the group, and is still responsible for
crafting the group’s strategies and plans
• On the board are Yong’s wife Chong Chin Lin, his sister Yong Lai Wah, and his son
Andrew Yong.
• Yong, his wife, and his sister are major shareholders in the company via their
interest in Yong Pang Chaun Holdings Sdn Bhd, which owns a 43.74% interest in the
group as at June 30, 2014
• Another notable shareholder is icapital.biz Bhd, which holds 2.88% and is the third-
largest shareholder.

14. ECONOMIC MOATS
• Cost Advantage
• Its EBITA margin declined over the years from 18.3% (FY11) to 11.8% (FY15), but its
margin is still the highest in this industry
• Switching Costs
• Basically, there is no switching cost at all
• Network Effect
• Lower to Middle Income Group
• Strong Concept store strategy and Brands Outlet

15. ECONOMIC MOATS (CONT.)
• Intangible Assets
• Strong brand and regularly release new design
• The success of Padini is its retailing strategy that focuses on the different market
segments. Each brand under the group provides a distinctive image and identity for
its targeted market
• Store presence and a distinctive store layout are part of the brand building strategy
• Efficient Scale
• A prominent retailer in the Malaysian market
• Extensive branch network throughout the country.

16. ECONOMIC MOATS (CONT.)
58.8%
50.8%
43.4%
37.8%
28.4%
-19.5%
27.7%
70.3%
10.1%
51.8%
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
ROIC and CROIC
Avg. Capex Avg. Invested Capital ROIC % CROIC %

17. ECONOMIC MOATS (CONT.)
• Even if its ROIC was above 10%, but the ROIC was trending down in the past 5 years
due to increase of inventory
• PADINI’s CROIC was very volatile, but it is mainly due to increase of working capital
in inventory
• Under normal circumstances, it is able to maintain above 10% CROIC.

18. BRAND POSITION
• Well recognized brand may be marketed across multiple product segments and
recognized as a leader in these segments
• Consumers have loyalty, but not exclusively, to the brand
• Brand has a long term track record of revenue growth with low revenue volatility.

19. DIVERSITY OF DISTRIBUTION
CHANNELS
• Various channels:
• Free Standing Store
• Multi Brand Store
• Consignment counters
• Concept stores:
• Padini Concept Stores (PCS)
• Brands Outlet (BO)
• Franchise Store
• Dealer Store

20. DIVERSITY OF DISTRIBUTION
CHANNELS (CONT.)
Source: Annual Report 2015

21. DIVERSITY OF PRODUCT
CATEGORIES
• The strategic business units possess different brands and offer distinguished and
different theme of products to cater to different customer segments
Companies Brands
Vincci Ladies’ Specialties Centre
Sdn. Bhd. (“Vincci”)
Tizio, Vincci, and Vincci
Accessories
Padini Corporation Sdn. Bhd.
(“Padini Corporation”)
Padini, Padini Authentics and
PDI
Seed Corporation Sdn. Bhd.
(“Seed”)
Seed and Seed café
Yee Fong Hung (Malaysia)
Sendirian Berhad (“Yee Fong
Hung”)
Brands Outlet and P&Co
Mikihouse Children’s Wear Sdn.
Bhd. (“Miki”)
Miki Kids

22. STABILITY OF PRODUCT
• Products are moderately discretionary, with easily-delayed purchases certain under
even mild macroeconomic or cyclical factors, and historically verifiable
• Demand is elastic, fashion risk/technological obsolescence is acute, and product
substitution is easy.

23. PROFITABILITY
18.8% 18.3%
15.3% 14.9%
11.8%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
EBITA Revenue EBITA Margin % Linear (EBITA Margin %)

24. PROFITABILITY (CONT.)
• In the past 5 years, EBITA of PADINI maintained in the range of 100m to 130m, but
the growth is not consistent
• The margin declined consistently every year due to:
• The implementation of the GST and subsidy rationalization program by the government
could potentially hamper consumer spending.
• Higher-than-expected operating expenses resulting from new store openings.
• Padini is facing intense competition in the clothes and apparel retailer market segment
especially with the entrance of foreign brands such as H&M and Uniqlo.

25. PROFITABILITY (CONT.)
• The recent EBITA margin is 11.8%, and this can be rated as Ba (equivalent to
mediocre)
• If compare to other competitors in Malaysia, PADINI margin can be considered the
highest.

26. PROFITABILITY (CONT.)
0%
20%
40%
60%
80%
100%
2012-06-30 2013-06-30 2014-06-30 2015-06-30
Revenue by Operating Segment
Vincci Padini Corporation Seed Yee Fong Hung Miki Others

27. LEVERAGE & COVERAGE
0.37 x
0.33 x
0.25 x
0.34 x
0.27 x
0.00 x
0.05 x
0.10 x
0.15 x
0.20 x
0.25 x
0.30 x
0.35 x
0.40 x
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
Debt / EBITDA

28. LEVERAGE & COVERAGE (CONT.)
68.09 x
51.14 x
61.07 x
58.14 x
40.48 x
0.00 x
10.00 x
20.00 x
30.00 x
40.00 x
50.00 x
60.00 x
70.00 x
80.00 x
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
EBITA/Interest

29. LEVERAGE & COVERAGE (CONT.)
285.1%
313.9%
414.3%
295.6%
385.3%
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
400.0%
450.0%
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
FFO to Debt

30. LEVERAGE & COVERAGE (CONT.)
• PADINI’s leverage and coverage are very healthy
• Debt/EBITDA – 0.27x (FY15) (Aaa)
• EBIT/Interest – 40.48x (FY15) (Aaa)
• Retained Cash Flow to Debt – 385.3% (FY15) (Aaa)

31. LIQUIDITY
94
124
102
93
78
0
50
100
150
200
0
20
40
60
80
100
120
140
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
Cash Conversion Cycle
Days In Inventory Days In Receivables Days Payable Outstanding Cash Conversion Cycle

32. LIQUIDITY (CONT.)
• Trend of cash conversion cycle is downtrend, and this is a positive sign where
PADINI’s liquidity is improving
• Days Sales of Inventory has been reducing since FY2012. This means number of days
that PADINI sell out stock reduced.

33. LIQUIDITY (CONT.)
(25,929)
53,057
141,640
24,780
152,401
(102,632)
(30,178)
38,476
(85,699)
42,513
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
Free Cash Flow to Firm WC Changes - Inventory
PADINI’s FCFF was very volatile, but it is
mainly due to increase of working
capital in inventory. Under normal
circumstances, it is able to achieve quite
a healthy level of free cash flow.

34. GROWTH DRIVERS
• 19 Aug 2015 - Six Padini Concept Store & 6 Brands Outlet to be opened in FY16
• The strong retail presence and long retail experience of the Group would enable the
Group to weather the competition in the retail sector
• Strong pipeline of new malls opening in Malaysia
• Vincci Online (not ready at the time of writing) – Increase market exposure via online
presence.

35. ISSUES/RISKS/CHALLENGES
• The implementation of the GST and subsidy rationalization program by the
government could potentially hamper consumer spending
• Macroeconomic headwinds simmer down – hamper consumer spending
• Higher-than-expected operating expenses resulting from new store openings
• PADINI yet to demonstrate successful execution of global growth strategies, which
benefit from their ability to deliver credible organic growth opportunities and
further diversification.

36. ISSUES/RISKS/CHALLENGES (CONT.)
• Intensified competition – PADINI is facing intense competition in the clothes and
apparel retailer market segment especially with the entrance of foreign brands such
as H&M and Uniqlo
• Nevertheless, PADINI’s strong and expanding store network had given PADINI an added
edge due its ability to reach out to less urban areas
• PADINI’s wide range of merchandise also ensures the Company remains relevant to the
various consumer needs. For instance, its presence in the value-for-money segment via
BO.

37. ISSUES/RISKS/CHALLENGES (CONT.)
• Intensified competition from online shopping portal, such as Lazada, Zalora, etc…
• 19 Aug 2015 – Over the short-term, costs will continue to stay at escalated levels
due to the gestation phase of new stores opening this year (6 Padini Concept Store
& 6 Brands Outlet)
• Shortage of skilled labour – It requires different abilities to successfully manage a
large specialty retail store base as compared to a wholesale model which sells to a
small number of large retailers
• Higher level of fixed costs due to the fixed costs of operating a store.

38. SEASONAL OR CYCLICAL FACTORS
• The apparel industry experiences shifting demand, due primarily to cyclical
economic factors and changes in fashion trends
• Spending is discretionary in nature, and can be deferred during weak economic
times as the consumer can ‘shop the closet’ instead of buying new product
• Demand is also a function of the vagaries of fashion – ‘gotta have it now’ often
quickly turns into ‘wouldn’t be caught dead in this’ tomorrow
• Few brands in this industry have demonstrated consistent and enduring appeal.

39. EXECUTION AND COMPETITIVE
POSITION
• Refer to Apparels (KLSE) – Peer Comparison
• Execution is well-above peers
• Leadership is evident in multiple markets across varying geographies, as well as
within the company’s product category(ies) with some potential fragmentation
acknowledged
• Online is growing and in early stages of integration, laying the groundwork for
future multi-channel capability
• Market position can be defended against most types of threats, with even minor
market share losses unusual.

40. SHAREHOLDER RETURN
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 5 Nov 2012 6.45 6,450 580 110 7,041 3.0%
5-Y 26 Nov
2010
5.31 5,310 1,010 1,250 7,570 7.4%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 6.56 (as of the time of writing)
3. Unit purchased is 1,000.

41. SHAREHOLDER RETURN (CONT.)
0.0000
0.0200
0.0400
0.0600
0.0800
0.1000
0.1200
0.1400
0.1600
2011-06-30 2012-06-30 2013-06-30 2014-06-30 2015-06-30
DPS
DPS Linear (DPS)

42. GOING FORWARD
• In my opinion, PADINI’s current valuation is very attractive. Its high dividend yield
help cushion market dips
• I still cautious on PADINI’s near-term earnings outlook due to risks of lower margins
and profits from absorbing the GST amid the weakening consumer sentiments
• Over the longer term, when macroeconomic headwinds simmer down, the company
is well positioned to ride on the up-wave, having already established its store
presence
• I will continue to hold and accumulate this stock.