Padini: A popular and affordable Malaysian clothing brand!
- Alex Tan
- Nov 23, 2015
- 4 min read
All of you know Padini right? But do you know that Padini is a public-listed company in Bursa Malaysia? I believe many don't know about this. If this surprises you, then you really need to continue reading and I will show you why is it one of my favourite companies!
Padini Holdings Bhd is principally engaged in the sale of both men's and ladies’ shoes and accessories, garments, ancillary products, children’s garments, maternity wear and accessories through various subsidiaries. It has presence in many shopping malls in Malaysia and Padini operates its business predominantly in Malaysia.
Take a look at the image above. Padini Concept Store is a concept well figured out by the management. It houses all Padini Holdings brands under one roof or what they called “one-stop-shopping”. According to the company's website, Padini Holdings is currently the market leader in the multibillion textile and garment industry in Malaysia.
Do you think that Padini's apparels are stylish yet affordable? This is the key to Padini's success thus far because the management has always desired to create fashion consciousness that is stylish yet affordable within their brand niches.
Well, let's take a look at three of Padini's brands which generate the most sales.
Brands Outlet's popularity is comparable to Padini Concept Store's fame. Cheaply bundled yet nice clothes can be found here. One day, my relatives and I went shopping for new clothes. I observed that they couldn't make a decision to buy a single piece of clothing after trying out many companies' products. Guess what, after walking into Brands Outlet, they came out of the store with some purchases! In the midst of current harsher economic situation, our net disposable incomes have been shrinking which causes people to move towards stylish yet affordable clothes!
Some other brands under Padini's umbrella.
Mr. Yong Pang Chaun is the managing director of Padini for more than 20 years. According to the latest annual report 2015, he has about 44% of direct and indirect interests in Padini through his private company, Yong Pang Chaun Holdings Sdn Bhd. 44% shareholding is huge! I feel a lot safer to invest alongside with this kind of CEO who has a common vision as me.
There are, of course, many other signs indicating that Padini's management is good. If you wish to know how I analyze a management, get a copy of my Value Investing All-In-One eBook.
Now let's see how did Padini perform financially for the past 5 years.
Revenues have been increasing. However, net profits stayed relatively stagnant, resulting in lower net profit margins. Padini's profitability has been suffering mainly due to competitions from H&M and Uniqlo. Also, according to the management, they have been very careful in passing down the costs to its customers.
Operating cash flows have been volatile but managed to stay positive. Interestingly, the management has managed to keep Padini's return on equity and return on capital employed at high levels, average 5 year return on equity is somewhere around 24%. This caught my attention.
Supported by its large cashpile, Padini has also been increasing its dividend payouts. My cash ratio is defined as total cash and cash equivalents divided by total liabilities instead of current liabilities to be conservative. As of 2015, Padini's cash is well in excess of its total obligations!
Despite having many repeated customers, Padini is facing challenges in maintaining its profitability. Some potential risks are the Goods and Services Tax (GST), foreign exchange, fashion trends etc.
Personally, I think the market has overly discounted Padini's share price based on the introduction of GST and unfavourable foreign exchange. These risks are short-lived. What's more important are the level of competitions and how Padini stands out of the crowd.
Despite facing hiccups in reducing profitability, over the long run, I am still pretty confident in Padini's brand equity among the Malaysians due to its stylish yet affordable clothes. My take is, the emergence of H&M and Uniqlo somehow eroded Padini's attractiveness. However, its brand equity has formed an economic moat for itself which leads to good customer traffics!
What I wish to emphasize is, in investing, it's more important to focus on the durability of a company's competitive advantage. In the years ahead, I am quite confident that the Malaysians will still buy Padini's products due to its stylish yet affordable clothing.
Source: Bloomberg
Note: This value pyramid only shows what I think about a company’s valuation as at the time of writing this particular article. Do bear in mind that when a stock is undervalued, it doesn’t mean it can’t go any lower and vice versa. Please exercise your own judgment and do not treat this as a recommendation to buy or sell.
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