GS Holdings Limited - Phillip Securities 2016-06-20: Industry leader and gaining traction

GS HOLDINGS LIMITED 43A.SI

GS Holdings Limited - Industry leader and gaining traction

We visited the Company recently and were hosted by Executive Director & Chief Financial Officer, Mr. Kenneth Foo. We left with a better understanding of the business and strategy going forward.

GS Holdings Limited (GS Holdings) is Singapore's leading centralised commercial dishware washing company that specialises in providing end-to-end cleaning services for Singapore's food and beverage (F&B) industry.
GS Holdings was listed on the Singapore Exchange on 18 January 2016 through a Placement of 24,000,000 Placement Shares at S$0.25 each.

According to third-party research by Converging Knowledge Pte Ltd. (source: GS Holdings Limited Offer Document, 7 January 2016), the potential market size of centralised dishware washing services in Singapore was estimated to be between S$290mn and S$340mn in 2014 for food and beverage (F&B) services establishments. Market penetration then was estimated to be only 2%, of which GS Holdings had 40% market share. This estimate of market size from F&B services establishments does not include banquets, Meetings, Incentive Travel, Conventions & Exhibitions (MICE) events, and other non-F&B services related organisations such as hotels and hospitals.
There are currently three main players in the centralised dishware washing services industry. They are Great Solutions Pte Ltd (wholly-owned subsidiary of GS Holdings), Synnovate Solutions Pte Ltd and Hygieia Ware Washing Pte Ltd.

GS Holdings derives its economic moat from several differentiating factors against its competitors.
First, GS Holdings is the only centralised dishware washing services provider with ISO 22000: 2005 food safety management certification and Halal certification.
Second, GS Holdings is the only centralised dishware washing services provider with sufficient scale to take on major institutional contracts, such as the one with a public tertiary hospital.
Lastly, GS Holdings is able to offer a fully-integrated solution of stewarding, provision of crockery and utensils, and centralised dishware washing. The other market participants typically only offer one of the services, and not the complete supply chain.

GS Holdings has recently moved into their new Loyang facility in March 2016, after relocating from their previous facility at Senoko (3-lines). Three of the original lines from the Senoko facility have been relocated to the Loyang facility. The Loyang facility will have 12-lines (10 + 1 halal + 1 full automation) when fully-operational. For now, only the full automation line has not been installed and is expected to arrive in July.
Based on the current shift-work arrangement disclosed by Management and our observation, we believe the current utilisation rate of the Loyang facility is significantly lower than half.

GS Holdings announced in May 2016 the award of a contract from Suntec Singapore Convention & Exhibition Centre (Suntec Singapore) to provide on-site dishware washing services, night kitchen cleaning and wet waste management services. GS Holdings will take on the role of operator of the facility that is owned by Suntec Singapore. This is GS Holdings' first foray to provide on-site centralised dishware washing services to the MICE industry.
We understand that there is also strong demand for the provision of crockery and utensils together with off-site centralised dishware washing services from the hotel banquet industry. The benefits are that hotels can do away with procurement and inventory management of the crockery and utensils, and covert space originally used for dishware washing to other income-generating uses.

Similar to their existing IMM and Big Box facilities, GH Holdings is able to offer its dishware washing services outside of Suntec Singapore. This includes the F&B services establishments within Suntec City Mall and the surrounding areas.
We understand that some F&B services establishments within Suntec City Mall have already expressed interest in engaging the services of GS Holdings.

One of our concerns was on logistics and the turnaround time to deliver clean crockery and utensils to their clients. We have learnt that soiled crockery and utensils are collected twice a day – after the lunch service and after the dinner service. There are typically two or three sets of crockery and utensils being rotated with their clients. Hence, there is minimal execution risk of not being able to deliver clean crockery and utensils to their clients in a timely manner.
Execution risk is further mitigated if the client uses crockery and utensils supplied by GS Holdings, instead of their own unique set. Turnaround time of the wash cycle is typically 30 minutes for batches of standard items, and 45-60 minutes for batches with odd-shaped items.

While we do not have coverage on GS Holdings, we are highlighting the stock to clients now, as we see potential in the business model. Success of the business model hinges on macroeconomic, demographic and policy factors that would drive convergence towards centralised dishware washing.
Key risks for GS Holdings are the lack of a profitable operating track record and the short order book visibility of only one year ahead.

Richard Leow CFTe Phillip Securities | http://www.poems.com.sg/ 2016-06-20

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