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Centurion Corporation Limited and pricing power.

Saturday, May 20, 2017


Businesses can either be price setters or price takers. In a fiercely competitive environment where there is perfect competition, businesses are mostly price takers.


Customer:
"How much is this?"

Shop:
"$20.00"

Customer:
"Aiyoh, internet selling $10.00 only."

Shop:
"Oh... OK, $10.00."


If I were the shop owner and if this were to happen on a daily basis, I have something to worry about.

Of course, businesses could engage in anti competition moves and set prices if there are only a few players in the industry. So, in an oligopoly, there is always a temptation to fix prices. This, by the way, is illegal in many countries, including Singapore.

A business is in a sweet spot if they are price setters and consumers are willing to pay a higher price for what they offer.

Customer:
"How much is this?"

Shop:
"$20.00"

Customer:
"Internet selling similar for $10.00 only."

Shop:
"Then, you buy from internet lor."


Customer:
"No, I like this. OK, $20.00"


Ka-ching!

How does a business get to be in such a sweet spot?

Differentiation. 

Better quality, better features, better design etc. Something that differentiates them from the competition in a positive way which makes consumers willing to pay a premium.

This is not an easy feat. 

It is even more difficult to maintain this edge these days because copy cats are fast to act.

What? You have a patent? 


Try telling the Chinese factories.

So, if it is a product, be prepared to see copies within a matter of months, if not weeks.

What about businesses which are providing a service?

Well, they are not safe from copy cats either. Business models can be copied too.

Some are worried about the competition faced by Centurion when it comes to workers' dormitories as more players jumped on the bandwagon. 

It is a valid concern and I did say that I would keep an eye on this relatively new investment of mine. So far, so good.

Of course, I am not the only one keeping an eye on Centurion and a reader recently sent me a report by PhillipCapital dated 19 May. 

I am sharing the stuff which I find more interesting here:

1. Higher occupancy for workers’ dormitories at Westlite Woodlands (c.95% in 1Q17 vs. c.90% in 4Q16) and ASPRIWestlite Papan (89% in 1Q17 vs. 75% in 4Q16). We estimate rental rates increased c.1%.

2. 1Q17 net profit margin improved to 33% compared to 32% a year ago. The improvements 
to net profit margin was due to ASPRI-Westlite Papan becoming more profitable in 1Q17 but
slightly offset by higher Cost of Goods (“COGs”) and higher interest expense.

3. Centurion continues to enjoy a high operating leverage where they will be able to grow revenue faster than costs through positive rental reversions.

4. Singapore Workers’ Dormitory Portfolio have almost hit full occupancy by 1Q17, well ahead of our expectation of hitting full occupancy by end of 2017. We expect the supply constraints in workers’ accommodation to continue while the strong pipeline of public sector construction projects which are expected to last till 2020 will keep Centurion’s Singapore workers’ dormitories fully occupied.

5. We are pleased to see Centurion’s ability to command a price premium for its Singapore workers’ dormitories and yet ramp up its occupancy faster than expected. All these despite
competitors slashing prices and weaknesses from the oil and gas industry that we have
witnessed in 2016.

6. ... expectation for stronger operating cash flow as a result of Centurion’s continued ability to exercise pricing power in its student and worker accommodation business across markets ...


In a competitive environment, we want to invest in a business that is able to retain pricing power.

Remember this blog?

My investment portfolio.

Centurion Corporation Limited is a relatively substantial investment for me and if I were to update the list:


From $350,000 to $499,999:
AIMS AMP Cap Ind'l REIT


From $200,000 to $349,999:
ACCORDIA Golf Trust

CROESUS Retail Trust
FIRST REIT


From $100,000 to $199,999:
ASCENDAS H-Trust

QAF Limited
WILMAR Int'l
Centurion Corporation Limited

What made me invest in Centurion Corporation Limited again? The answer is in this blog:

Added Centurion Corporation Limited to my investment portfolio.

Related posts:
1. Full year 2016 report.

3 comments:

AK71 said...

Since Jan 1, non-Malaysian work permit holders from the manufacturing sector have no longer been eligible to rent a whole Housing Board flat, and can only rent rooms.

Those currently renting can stay on until their existing subletting approvals expire.

The rule change, reported by Chinese daily Lianhe Zaobao yesterday, affects about 3.5 per cent of HDB households that are subletting all or part of their flats.

It is unclear how many households this represents. As of Sept 30, there were 52,394 wholly sublet HDB flats.

On June 1, 2016, the HDB sent a letter to flat owners who currently sublet their flats to non-Malaysian manufacturing work permit holders "to inform them of the change, so that they would have time to make the necessary preparations".

In response to queries, the HDB said: "This revision in subletting conditions is part of the Government's longer-term plan to house non- Malaysian work permit holders in purpose-built dormitories and approved workers' quarters with facilities to better cater to their needs."

Work permits are for semi-skilled foreign workers in the construction, manufacturing, marine, process or service sectors.

Now, only non-Malaysian work permit holders in the service sector can rent whole flats.

Source:
http://www.straitstimes.com/singapore/new-hdb-rental-rules-for-work-permit-holders

Janson Tyle said...

so the rest of your stocks like ST Engineering, Old Chang Kee etc is under $100,000 in value ?

AK71 said...

Hi Janson,

That is correct. :)

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