AEON Credit: Perhaps this other AEON is even better

I can tell you that I perhaps was looking at the wrong AEON or rather overlooked it. While I like AEON, the supermarket and mall business, what I missed out is its credit business. I have always treated it as a supporting business to its mall operations than a business that can stand alone by itself. Perhaps it is still very dependent on the mall, but its credit business is making waves.

Let me tell you why I took it for granted the business of credit for AEON:

• I took the cue from Courts. While at first it was doing pretty well, later on it did suffer from its receivables problem as well as other competitors;
• AEON Credit is non-deposit taking financial organization. When your costs are higher than the banks, it will take a bigger effort to compete. Already most banks are credit card issuers, what is another card issuer from AEON?;
• the RM50 yearly tax on credit cards by the government. Need I say more, the total cards in circulation will surely drop;
• receivables - I could not really understand how good or how bad this can go.

Well, then let's look at its 5 years performance.

Its growth is fantastic over the last 5 years, but starting from small base

At its current price of RM11.92, while may have had a run quite a bit recently, it is still trading at below 15x PE. Worth looking, if it's business is to grow at this pace and the concerns that I have mentioned are addressed. Let's look at these concerns then.

Competition

Plenty, if you take the banks into account. What differentiates AEON from the banks is that it is a very much shoppers based credit card. If you noticed, Tesco ties up with RHB Bank, Giant ties up with Citibank for the cards. AEON whereas, has its own card. I hold an AEON card but not its credit card (which may be a mistake). AEON does provide better benefits to its credit card holders. Hence, over here if you feel that AEON, the supermarket's business is growing, then the card business will continue to grow, for sure. Competition is there but AEON Credit has its own space that it is slowly building on.

Costs of doing business

Banks are able to have costs of funds as low as 2% to 3%. By issuing cards, banks are enjoying chargeable rates of 18% to 24%. Fantastic. What about AEON Credit? I would have thought its costs of credit would be much higher. If you look at the red box below, its longer term rates are below 5%. Wow! for a non-deposit taking organization. If we read further, it sources for USD financing which it hedges against fluctuations. Well, if the financing is in USD then possibly the rates can be that low.

What about receivables?

My biggest fear in the cards business is bad receivables. From below, its past due receivables are less than 10% of its total. Past due receivables does not mean it is not collectible and the below 10% threshold is very manageable, I should think.

As for the RM50 charge from the government, it is something no credit card company can do about it. If any, the measure by the government has stabilized the credit card base, which means that it is much more difficult to do new customers acquisition than before.

My take

If any measure is to be used, AEON Credit's business has yet to reach its full potential. Riding on its supermarket and mall operations business alone, the credit business itself has the potential to grow further. If you notice, AEON is concentrating on building mid-sized malls in new and some old townships than just operating a supermarket business. Its cards business is working on promotions with the tenants that AEON has. Now, with the growth of the mall business alone, it should be able to ride on the momentum. However, over the last few years, what we managed to see was that AEON Credit in fact grew faster than AEON.

If it continues to be able to manage the bad debts and costs of credit well, then this stock is one attractive company.


What does AEON Credit do?

Rather than trying to explain at length, let me just cut this out from its annual report and show from here. :)