It is funny how previously I wrote about why I bought Koufu and here I am after more than one year, writing why I sold Koufu. If you have yet to read more about Koufu, you may refer to this post where I shared about the reasons why I bought Koufu.
I sold Koufu in two tranches. I sold half of what I owned in Koufu in November 2020 while I sold the remaining of my stake in Koufu 5 months later, just a few trading days ago. Surprisingly, I sold Koufu at the same price even 5 months have passed, while we see many recovery play stocks like Genting Singapore, SIA and SATS see their share price soared by more than 30% over the same period of time.
So What Happened to Koufu?
I would like to give a brief introduction on what happened to Koufu over the past two years. Koufu ended FY2019 with Revenue growing 6.1% to $237.5 million while Net Profit growing at 13% to $27.7 million.
Koufu reported that it entered 2020 with a strong note from their excellent financial performance in 2019 but COVID-19 came into the picture. In Macau, it closed its borders to tourists and as a country that largely depends on tourism, operations in Macau were largely impacted by significantly lower footfall even though the food courts at University of Macau and Cotai Sands remained operational.
In Singapore, due to the Circuit Breaker measure that lasted from 7 April 2020 to 1 June 2020, Koufu had to suspend operations of some food courts, quick-service restaurants and full-service restaurants to reduce operating costs due to low footfalls. In addition, even though Koufu were permitted to operate its food courts and coffee shops, dine-ins were not permitted which encouraged people to cook at home, resulting in a decrease in revenue for both Koufu’s business segments. Furthermore, the tightening of Circuit Breaker measures resulted in all but one R&B tea kiosk to be suspended from 22 April 2020. This resulted in 2Q2020 same store sales basis excluding new outlets to decrease by 40% as compared to the same period last year.
Footfalls and revenue for food courts and coffee shops located at heartlands as well as R&B tea kiosks and 4 full-service restaurants saw significant improvements after the resumption of dine-in services. However, footfalls at food courts located near offices, down-town areas, tertiary institutions as well as tourist hot-spots continue to remain low. This resulted in Group’s revenue in Q3 2020 to show significant improvement compared to that of in Q2 2020 where same store basis excluding new outlets decreased by 20% compared to the same period a year ago.
COVID-19 pandemic has resulted in Koufu to report a 19% decrease in Revenue from $237.5 million to $192.4 million while its Net Profit decreased by 64.3% from $27.7 million to $9.9 million.
Reason 1: Little Interest in Trading Koufu
There are other recovery play stocks such as Genting Singapore, SIA and SATS which saw their share price soared by 30% since November last year but Koufu is literally just flat even though things got better in Singapore over the past few months. I blame it on the low trading interest in Koufu.
The key to move the share price of any company requires collective effort from traders and investors in terms of trading up the stock.
As you can see from the data gathered from SGInvestors.io, Koufu’s average trading volume has been on a decline on a 1 week, 3 month and 1 year basis. 1-Week Average Volume was only 191,233 shares traded, a 50% decline compared to the 3-Month Average Volume of 381,248 shares traded and a 17% decline compared to the 52-Week Average Volume of 455,737 shares traded. As there is no catalyst driving the share price upwards over the past few months (besides going into Phase 3), this resulted in the share price to go sideways since June, as people are selling their shares at bid price to buyers.
Uncertainty of when Phase 3 will be lifted
The news of Singapore going into different phases of reopening did lift up the share price temporarily in which it got sold down thereafter. At the time of writing, I believe there is no catalyst that will spark share price to go up on heavy trading. Even if that is so, it will eventually be sold down like before.
It is uncertain when Phase 3 will be lifted as the Health Minister told the Parliament that the reopening could take at least a year. Furthermore, Phase 3 is known as a “new normal” which will last until there is evidence that vaccines are effective in future outbreaks, a substantial proportion of the population must be vaccinated and the rest of the world must have the coronavirus under control.
The news just reported that more than 350,000 Singapore residents, or just 6% of the population received their first dose of vaccine and only 215,000 residents or 3.5% of the population completed their vaccination. This means that there is still some time before we can resume back to pre-covid days. Therefore, I believe that there won’t be any catalyst that can spark the share price rally for the time being, even the release of the financial result one week ago did not interest traders and investors to buy Koufu for recovery.
Will WFH still be the norm for the majority of the companies after how they saw the feasibility of it during the pandemic? You may want to read DBS CEO Piyush Gupta on his thoughts about WFH post covid. In summary, he thinks that DBS will not go back to the old ways of working but as social creatures, he believes that there will be critical changes that will drive the “future of work”, such as greater flexibility in respect of time and hours of work required and more distribution of workforce by location.
As reported by one of the analysts covering Koufu, approximately 50-60% of Koufu’s revenue is derived from the heartland while the remaining are from food courts in town, education institutions and Macau. This would mean that financial performance moving forward will still be under pressure unless the company can make up the potential reduction in revenue and net profit with new stores opening in the heartland. It is reported that Koufu will be opening two new locations for R&B Tea kiosks in Q1 2021, three new food courts in Q2 2021.
With my explanation above, it brings me to my third point – Opportunity Cost. Opportunity Cost is defined as the representation of the potential benefits an individual, investor or business misses out on when choosing one alternative over another.
The main reason why I decided to sell half of my position in Koufu in November 2020 is because I believe that I will get more returns from venturing out of Singapore into the US market where there is a lot of liquidity in the latter market. As a young investor, I should not be buying into companies that are defensive and should take more risk and buy into growth companies that can be found in the US market.
I decided to keep the remaining half of my positions in Koufu as a non core holding until a few trading days ago as I believe that Koufu is a recovery play stock and it will rise with the lifting of circuit breaker measures. If you look at the share price performance over the past few months, you could see that the prices are sold down with every spike up on such news. I am not sure whether this will play out again in the coming months.
You may think that I am impatient in waiting for the recovery of the share price. I am not sure whether existing shareholders share the same sentiment as me. I seriously think that existing shareholders should consider other opportunities elsewhere. I may be wrong but I will continue to monitor Koufu in hope that recovery of share price will eventually happen for existing Koufu shareholders holding onto their shares.
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