Cover Story: Wishing on a new star

Cover Story: Wishing on a new star

Tycoon Tan Sri Vincent Tan sees direct-selling company Cosway as the next big thing for Berjaya Group. It will be, he says, the biggest business he has ever built. He explains why the three-decade-old company is ready to shine.

This huge building cost me my DiGi shares,” says Tan Sri Vincent Tan, rapping the conference table in his 12th floor office at Berjaya Times Square.

Tan disposed of his controlling block in DiGi.com Bhd between 1999 and 2005, and he clearly hasn’t gotten over it, as DiGi’s market capitalisation has more than tripled to RM17 billion since.


Though the recent meeting with Tan was supposed to focus on Cosway Corp Ltd, which he describes as the rising star in the Berjaya Group, it was quite clear he rues the missed opportunity in DiGi .


Tan sold about 30% of DiGi in 1999 to Norway’s Telenor ASA for RM790 million, followed by the disposal of another block of 14.4% in 2001 for RM711.3 million. He was then left with a 20.5% stake, which he disposed of in the subsequent years. Finally in 2005, he placed out a block of 35 million shares when DiGi was trading at less than RM7 per share, and ceased to be a substantial shareholder.


The stock hit RM20 per share on the back of a rising dividend play in 2007.


Saddled with a huge debt coupled with a commitment to complete the RM1.8 billion Berjaya Times Square project in the aftermath of the 1998 Asian financial crisis, Tan says he had no choice but to sell DiGi. But he did hold on to another jewel in the group — Berjaya Sports Toto Bhd (BToto).


Though BToto is the group’s goose that lays the golden eggs, generating a constant healthy free cash flow, its valuation is stagnant because the gaming business is considered matured. For instance, it is hard to see how BToto’s market cap, Tan’s favourite measure of his company’s success, can double from its current level of about RM6 billion.


Against this backdrop, Tan has been trying over the past few years to create a new star business within the group.


It has not been easy because Tan is viewed as bigger than Berjaya itself. Tan is said to have gained the confidence of former prime minister Tun Dr Mahathir Mohamad, and to be close to current leader Datuk Seri Najib Razak. It is acknowledged that without Tan, there would be no Berjaya.

It goes without saying that Berjaya, like most other large companies, enjoys  a cozy relationship with the government of the day. But such connections are sometimes a liability, as evident in the “V K Lingam case” of judge-fixing, where Tan’s name cropped up.


But the side-shows have in no way distracted him from polishing up another gem within the diversified group.


Two years ago, before the sub-prime mortgage crisis in the US, he was heavily promoting Berjaya Land Bhd (BLand), which was touted as the group’s next big star at the time of its big push into Vietnam’s booming property market.


He saw Vietnam as being like Malaysia some 20 to 30 years ago, and thus providing another opportunity to create another Berjaya Group.  


Initial reaction was positive, as Vietnam was one of the brightest stars in the emerging markets. BLand’s stock did well, with its market cap (excluding the value of irredeemable convertible unsecured loan stocks or ICULS) surging to over RM6.9 billion in 2007/2008 (now it is down to RM5.82 billion).


But then the global financial crisis took a toll on the real estate market worldwide, including that of Vietnam. So it may take a while for BLand to deliver some strong results and drive up the excitement again.

Enter Cosway Now, with the global economy starting to pick up, Tan is pinning his hopes on Cosway, a direct-selling business he acquired in 1994, as the next money-spinning star of the group. Cosway was delisted in 2007 at a market value of about RM413 million on the grounds that investors did not value the business. Nevertheless, through a corporate exercise completed late last year, Cosway was “relisted”, but in Hong Kong into Berjaya Holdings HK (Ltd), which was renamed  Cosway Corp Ltd, at some RM1.11 billion (HK$2.55 billion). Its implied value has grown 10 times higher, based on the HK$9.84 billion (RM4.28 billion) market capitalisation of Cosway. This is based on its closing share price of HK$0.78 last Thursday, and the inclusion of Cosway’s 10.95 billion units of ICULS. (In taking into account the HK9.84 billion market capitalisation, it is assumed that the ICULS that are convertible into Cosway shares on a one-to-one basis are valued at the same price as the stock.) “Cosway has the potential to become the largest market cap company within all the businesses that I am involved in,” says Tan. He says it is within reach of beating BToto’s market cap of RM5.9 billion now, and could surpass DiGi’s current market capitalisation of RM17 billion in the future. “This is not a pipe dream. I have grown many businesses to be worth billions. And I think Cosway has tremendous potential.” But it must be noted that the Cosway shares and ICULS are highly illiquid. The ICULS are 100% owned by Berjaya Corp Bhd (BCorp) and are hardly traded. Also, BCorp, in which Tan has a 53.33% stake, holds 73% of Cosway. Considering the illiquidity, trading in Cosway shares is modest. During the injection of Cosway into Berjaya Hong Kong, a large number of ICULS, rather than new Cosway shares, were issued in order to maintain the required 25% public float of Cosway. Tan justifies Cosway’s near HK$10 billion market capitalisation on the grounds that it is about 43 times price-to-earnings ratio (PER), based on this year’s projected net profit of RM100 million, or HK$230 million. He describes the valuation as “reasonable”, and explains that a lot of companies listed in Hong Kong trade at a market cap of more than 35, 40 or 50 times PER, or even 80 or 90 times. “So Cosway is 40-over times. But Cosway has the potential, the capability, to increase its profit by 50% every year. A growth of about 50% is very achievable. So in two years the 43 times earnings multiple comes down to 20 times. And what if we could double the profits?... Its earnings multiple will go down to the teens very fast,” says Tan. Comparing Cosway’s 40-over times PER to Parkson Retail Group Ltd’s 35 to 38 times PER, Tan says Parkson’s avenues for expansion are limited to China and Vietnam. “But Cosway can expand to anywhere in the world, such as the US, Japan, South Korea and so on,” he says. Cosway, Tan says, plans to go into four new markets this year — Japan, the US, the UK and Turkey. This will be on top of the existing nine markets that Cosway is currently operating in — Australia, Brunei, Hong Kong, Indonesia, South Korea, Singapore, Taiwan and Thailand, apart from Malaysia. And assuming it gets its direct-selling licence in China next year, Cosway will enter the world’s most populous market. While waiting for the licence, Tan says Cosway is already selling products in China, via the Internet, from its Hong Kong office. And the company is preparing to penetrate mainland China. This is obvious as seen by the busloads of aspiring Cosway distributors flying in from China, at their own expense, to attend seminars and training sessions conducted by the company in Wisma Cosway. The potential of China is huge for Cosway. “Amway is doing US$2.5 billion (RM8.5 billion) sales in China. We know we can do better than Amway. They have a head start in China, that’s all. It’s not that their product is so great or their company is so great. Cosway is a little bit late but... has the formula that will catch up pretty fast,” he adds. Entering huge markets like the US and China is key to Cosway’s projection of rapid growth. From the target of 1,600 stores (730 local and 870 overseas stores) this year, the company plans a sharp increase to 2,420 stores (including 1,650 overseas stores) in 2011, 4,610 stores (3,400 overseas stores) in 2012, and 8,950 stores (7,500 overseas stores) in 2013. As the numbers show, most of the projected new store openings are in overseas markets. On whether the projected 460% increase in store fronts between 2010 and 2013 is a bit too optimistic, Tan explains that if Cosway can open 730 profitable stores in Malaysia, it is only logical to assume that it can multiply the number of new store openings as it enters huge markets like the US and China. Funding woes? Funding, according to Tan, is not a problem as the expansion can largely be financed by Cosway’s growing cash flow. According to Cosway’s managing director Al Chuah, it costs an average of RM50,000 to open a new store, and this investment can be recovered in a matter of months. Tan says they can handle such expansion using internal cash flow. “But if there are immediate opportunities and we need bigger capital to grow, we can borrow some money. Cosway can gear up. It won’t be a problem if it has to borrow RM100 million to RM200 million, or even in US dollars. We can also place out new shares, but this won’t be necessary,” says Tan. Of Cosway’s previous overseas expansions that flopped, Tan says the company wasn’t ready at the time. “We went into the Philippines, Mexico and Brazil and we ended up losing quite a bit of money. But it was a good lesson. In recent years, Cosway has improved the business model and found the right formula — the free store model — to go overseas,” says Tan. (See separate story on Cosway’s changing strategy.) A free-store model is where Cosway sets up the store, pays the rent and expenses and gets an individual to run it purely on a commission basis. This strategy has been so popular, Cosway is looking at applying its direct marketing business model to other products, such as fashion and apparel. “Think about it — Cosway has the potential to become the Walmart of direct selling. And we want to be in the top three of global direct-selling companies in 10 to 15 years. Of course when we say this, people may laugh. But you know I’ve started so many businesses, everybody laughed at me. But when we finally made it up there, nobody laughed,” says Tan.

The value of BCorp… Thus far, the Cosway story is not reflected in  BCorp, which has a market capitalisation of RM5.59 billion on a fully diluted basis. Based on the sum-of-parts valuation, BCorp’s 78.98% stake in Cosway alone on a fully diluted basis is worth RM3.38 billion. Note that BCorp also controls 54.45% of BLand, which is worth another RM2.59 billion. Add up the numbers and one realises that there has been no value attributed to BCorp’s other businesses and assets, such as its Mazda vehicles franchise, consumer businesses, insurance and so on. “It will, it will [for investors to appreciate the inherent value of BCorp], whether on the basis of sum-of-parts or [others]. This is also the reason we listed Cosway, to let investors recognise its value so it can then be reflected in BCorp as the holding company. You don’t need to be a top analyst to calculate... if Cosway is worth so much, then BCorp should be worth this much, considering that we also own other good businesses,” says Tan. Asked whether BCorp shareholders can be rewarded with some free Cosway ICULS, Tan said he might consider it. “I own 53% of BCorp. If I distribute 10% of Cosway ICULS, I personally get 5.3%... that’s not bad,” he says. Despite BCorp being undervalued, analysts and fund managers generally shun BCorp. Tan says it is “okay” if they don’t buy shares in the holding company. “But they should invest in Cosway due to its potential,” he says. As for BCorp, Tan feels it will be better appreciated three years from now. “If [BCorp] investors are willing to stay with us for the long-term, we have good businesses. Of course we have gone through ups and downs. But we have built up our businesses,” he adds. Since the crisis, the star performer for Berjaya Group has been BToto, but the gaming business is considered matured. DiGi would have given the group good growth in earnings but it was divested. Moreover, DiGi was owned by Tan in his personal capacity and not the Berjaya Group. Two years ago, Berjaya Land and its foray into Vietnam was positioned as the new growth area for the group but that too quickly floundered. Now, Cosway is being positioned as the star performer of the group with its exposure to China. Whether that materialises or not will be determined in the next few years. This article appeared in Corporate page, The Edge Malaysia, Issue 790, Jan 25-31, 2010