Several p2p investors recently asked me if I’m lending to Epicentre. I’m a fan of Apple and Steve Jobs, but I’m not lending to this loan. Retailing is a low-margin, high volume business and I struggle to see how volume will pick up for Epicentre, especially when Apple Store is coming to town. No thanks, I’ll pass.
Retailing is tough business
Retailing is a competitive industry where margins are razor-thin. Epicentre sells mainly Apple products but the past several years’ results have been weak. For the borrower, 2014 was loss-making; 2015 broke even but operating margin is just above 0%. At the group level (using its Group Annual Report), profitability remains a key concern for me. See below.
Source: Annual Report
Challenging Outlook due to Apple Store
What I worry more is whether Epicentre’s business will take a hit when Apple Store comes to Singapore. If I’m looking to buy an Apple product, I’m more likely to go to the Apple Store, instead of the resellers. If the rumours that the Apple Store will be in Orchard Road are true, Epicentre’s 3 outlets in Orchard – Wheelock, ION Orchard and 313 – will be most impacted.
Why borrow through p2p platform?
P2P platforms are usually for SMEs who has no access to capital markets and limited banking facilities. For a listed company to borrow $2m through p2p platform, this looks very unusual. Was Epicentre unsuccessful with other funding methods (i.e. banks, MTNs, placement or rights)? Why was it unsuccessful?
Can the guarantor repay if the borrower can’t?
The guarantor (the holding company) derives most of its cashflows from the borrower. If the borrower can’t repay, the guarantor most likely can’t repay too, in my view. The fact that the guarantor is SGX listed doesn’t mean anything to me. I still prefer the good old personal guarantee, where the directors are on the hook if the loan turns bad.
Source: Annual Report
In conclusion, I find this loan too risky for me. As it is now, the current profitability is weak. When Apple Store comes to Singapore, its business may worsen as its 3 outlets in Orchard Road will take a direct hit. Would a $2m loan to purchase more inventory improve its fortunes? I’m not so sure. I’ll pass.
Note: The credit rating and probability of default for this borrower is DP5- and 2.15-3.0% respectively. In my opinion, the risk is definitely much higher because Apple Store is coming and IT inventory becomes obsolete very quickly.
Further discussion on Epicentre’s p2p loan here: http://sgyounginvestment.blogspot.sg/2016/03/my-first-investment-into-crowdfunding.html#comment-form (comments there are unrelated to this blog).