Old Chang Kee - DBS Research 2019-09-09: Puffing Up Stable Growth


Old Chang Kee - Puffing Up Stable Growth

  • Strong brand name and well-established snack chain in Singapore with 86 outlets island-wide.
  • Potential growth driven by network expansion and diversification into the B2B sector.
  • Decent FY20F dividend yield of c.4.1%.
  • Stock return rating of 2 with fair value of S$0.76 based on 20x PE.

OLD CHANG KEE - The Business

Established snack and F&B chain in Singapore since 1956.

  • OLD CHANG KEE (SGX:5ML) is known for its signature curry puffs and to-go snacks sold at its high foot traffic kiosk locations.
  • Growth driven by network expansion and B2B model. The company believes that it has a headroom of ~20 more stores to grow in Singapore. Branching into a B2B model, supplying snacks to institutions such as hotels and in-flight catering service providers, etc. could fuel growth.


Fairly value of S$0.76.

Potential stock price catalysts.

  • Old Chang Kee’s growth hinges on whether it can scale up its B2B business model. In addition, the company is expanding its margins through new brands and higher-margin products and other operational efficiencies by leveraging on technology to reduce manpower.

What could go wrong with this stock?

  • We believe inability to scale up its B2B business and enhance margins could stifle earnings growth. Failure to deliver could result in little or no arnings growth.


Network expansion in Singapore.

  • Old Chang Kee has increased its number of outlets from 76 kiosks back in FY13 to 86 kiosks in FY19. The management believes that it still has about 20 kiosks worth of headroom to grow and will continue to look for strategic locations to rent.

Expanding its retail presence overseas in the UK.

  • The company opened its first flagship outlet in Covent Garden, London, UK in FY19 and received many positive reviews. Despite the high manpower and overhead costs, the company plans to further expand its retail presence in the UK.

Ramping up its B2B efforts.

  • Old Chang Kee’s diversification into the B2B sector is helping to boost its top line. Instead of bringing its products only to consumers, it also serves business operators in sectors such as F&B, travel and hospitality. For example, the company is serving curry puffs to passengers onboard Singapore Airlines flights through SATS Ltd. It also provides catering services for corporate and private events. Further, its central kitchen is also producing more upstream products such as sauces and mixes for various retail channels.
  • Outside Singapore, the company is also exporting upstream products such as sauces and mixes to Malaysia. Revenue contributed from other services increased from 1.5% in FY18 to 2.3% in FY19.


Selling and distribution expense is the main cost driver.

  • Employee compensation and the purchase of inventories are the two main cost components for the business, followed by rental expense on the operating leases of the company’s kiosks located countrywide. Selling and distribution costs as a percentage of sales has been fairly stable at the 40% level since FY16 while COGS as a percentage of sales improved to 36% in FY19.


Central kitchen with sophisticated pastry-making machineries.

  • The company owns sophisticated pastry-making machines from a reputable Swiss manufacturer which helped the company to automate the cutting of dough and filling of curry puffs to ensure a consistent product sold countrywide. Automation efforts such as this has helped the company to reduce manpower requirements, improve productivity and increase the capacity of the factory. The company owns a food factory in Woodlands, Singapore and an industrial building in Johor, Malaysia. Both are for the purpose of manufacturing and distributing food products.


Higher-margin product mix through continuous innovation in turning locally-inspired flavours into snacks and finger food.

  • This has helped to increase the price points for new flavours and the average selling price of its products, leading to increasing revenue at 5% CAGR from FY13-19. The company continues to refine the performance of its portfolio of kiosks and has since closed down low-performing outlets or temporarily closed some outlets for renovation works. As at FY19, the company has 86 outlets in Singapore with scope to increase this number at more locations in Singapore.

Improving profitability and margins.

  • Despite rising rental, manpower and raw material costs in Singapore, the company managed to keep its costs under control through improved food cost management via bulk purchases for its central kitchen and improved manpower efficiencies. The current staff per store ranges between eight and 20, and the management believes that it can use technology such as mobile payment systems to further supplement growth and reduce manpower costs.

New brands and seasonal products capable of driving margins.

  • The management takes pride in reinventing and in bringing the local flavours of Singapore to overseas markets or creating seasonal products. Aside from the Old Chang Kee brand, the company has also developed a range of distinctive brand names, including, O’ My Darling, O’ My Kampong (which is a vintage concept café to revive the olden days in Singapore), Bun Times (to extend the company’s Hainanese heritage), Mushroom café, Dip ‘n’ Go, and Curry Times. New brand names have the capability to command higher prices at their commencement, while seasonal products are capable of enhancing margins through better selling prices.


Led by an investor who took over and grew the business since 1986.

  • The Executive Chairman, Han Kee Juan, bought over Old Chang Kee from its founder in 1986. He is also the largest shareholder of Old Chang Kee with 58.6% direct interest in the business. He comes with more than 30 years of sales experience and plays an instrumental role in the development and expansion of the group’s business.
  • William Lim, the CEO of the company, is Mr Han’s nephew and is a cousin of Ms Chow Hui Shien, the Deputy CEO of the company. Lim holds a 7.3% direct interest in the company and brings with him more than 20 years of sales experience. He is responsible for the development of new products and in expanding the business in overseas markets.

Seeking growth through operational efficiencies and store expansion.

  • Old Chang Kee’s key strategy is to drive operational efficiencies, and to enhance its brand positioning, amidst the challenging retail conditions. It is continuously looking to grow its number of outlets, especially in Singapore and London. Other growth strategies include margin enhancement initiatives through product mix and technology.

Not Rated.

Risk: Moderate.

Potential Targe*: 12-Month S$0.76.

Alfie YEO DBS Group Research | https://www.dbsvickers.com/ 2019-09-09
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 0.76 SAME 0.76