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Enoch Yiu

Selling computers and selling coffee are two completely different things but Chevalier iTech Holdings is now mixing the two profitably.

Chevalier iTech, which listed in 1988, has long been a sales agent of Toshiba Computers and other office equipment that brokers have classified it as a technology play. The company is majority owned by another listed company Chevalier Group, which is involved in construction, hotels, insurance and investment.

But Chevalier iTech's two recent acquisitions in the food and beverage sector have left brokers in a quandary as to how to classify the firm.

In May 2005 the company spent HK$205 million to acquire Pacific Coffee from Thomas Neir, who founded the coffee chain in 1992.

Two months ago, it acquired Igor's Group which operates 21 restaurants including Wildfire, The Boat House and Cafe de Paris and others in Lan Kwai Fong, Soho and Stanley.

Currently, two-thirds of the company's profit comes from computer sales and one-third from food and beverage.

'It is hard to know if we should still keep it as a technology play or a retail counter,' a broker said.

The man behind the deals is Oscar Chow Vee-tsung, an executive director of Chevalier Group which was founded by his father Chow Yee-hing.

Oscar Chow,  a former investment banker, believed the change of business line would benefit shareholders.

'A few years ago, the board considered the computer business as very competitive and we decided it was necessary to diversify  in a bid to increase our revenue and improve our bottom line. We have done some research and found food and beverage retail business was a good business to enter into and we looked for buying opportunities,' Mr Chow said.

'We looked at a couple of other opportunities before the acquisition of Pacific Coffee which was sold at a reasonable price and had a lot of growing potential. In addition, Mr Neir, the founder had established a strong management who could run the business well.'

Like Mr Neir, Mr Chow had little experience of food industry before the deal. He graduated from Oxford University with a Master of Engineering degree and  worked for financial companies including BNP Prime Peregrine and Zurich Financial. Then in 2000, he joined the Chevalier Group and took charge of the subsidiary.

The HK$205 million Pacific Coffee deal represented a price-earnings multiple of eight times, which Mr Chow said was reasonable.

He believes acquisition is a quick way for the company to add food and beverage businesses overnight. Pacific Coffee is an established brand with 57 outlets including 44 in Hong Kong and the rest in Singapore, Beijing and Shanghai.

Cheung Yan-leung, a professor at City University of Hong Kong, said it was a good strategy for a company like Chevalier to diversify their business.

'When a company is finding its core business is having difficulty making a profit, it is a not ideal for the board to do nothing. Changing its business nature and diversifying into other sectors would be good to achieve better returns for shareholders,' Mr Cheung said.

The company's annual results for last year show that the strategy had paid off. For the year to March last year, profit surged  23 times to HK$37 million, which was partly helped by Pacific Coffee's contribution of a 10-month turnover of HK$180 million, with profit amounting to HK$18.8 million.

The earnings boost encouraged Chevalier iTech to buy Igor's Group two months ago for about HK$200 million.

'We had a good drinks business but we were still weak in the areas of food so we bought Igor's which has 21 restaurants,' Mr Chow said.

He has no plans to merge the Pacific Coffee and Igor's brands as each has their own reputation but he believes some areas can be integrated to save operating costs.

Chevalier iTech is still in the honeymoon period of being a technology and food company but many believe the firm will eventually surrender one of the businesses, based on past experiences.

In the early 1990s, Winton Holdings was involved in both the taxi financing and Chinese restaurant business. However, when the company was sold to JCG Holdings (now Public Financial Holdings) in the mid-1990s, JCG kept only the taxi financing business and gradually closed down the restaurants.

Tan Yoke Kong, director of Public Financial who was in charge of JCG at the time of the Winton takeover, said it was a natural decision to make. 'JCG was a bank and we had no management who knew how to run the restaurant business. We decided to gradually dispose all the 10 restaurants and focus on our banking business,' Mr Tan said.

Jade Dynasty, majority owned by comic artist Tong Wong Yuk-long, made the same choice. The company was originally a restaurant business but added Mr Wong's comic publication business after he became its major shareholder.

However, the dual businesses did not last long and eventually the company sold its loss-making restaurants in the following two years.

'Comic and restaurants were two different businesses and there was no synergy between the two business lines. The new management after Mr Wong's takeover were mainly creative artists and not from the restaurant business. We thus decided to focus on the profitable comic publication business and disposed the catering operations which was hard to make money due to keen competition,'  a source said.

VC Brokerage director Louis Tse Ming-kwong is more optimistic. He said it would be a good idea for Chevalier iTech to expand into the food business provided that it had some knowhow.

'Hong Kong is a services industry centre and there are high demand on premium coffee shops, restaurants and bars. The outlook for the food industry is positive because of the strong economy and increasing number of tourists. It looks to be a wise decision for Chevalier to step into the food industry,' Mr Tse said

'However, what is important is that it must have the right people with experience in the food industry to manage the food business.'

Mr Chow has kept the same management team at Pacific Coffee and required the founder of Igor's Group, Christopher Lenz, a veteran restaurant operator, to stay on for at least 21/2 years to run and expand the business.

'I am not the one to run Pacific Coffee or the restaurant business but I let the ones who know the business run it,' Mr Chow said.

Mr Lenz said he sold the company not for money but to grow his restaurant chain. 'I see the sales as a merger. For Igor's joining the Chevalier Group, it was easier to bargain with the landlord, have the capital to support a quicker growth, lower cost and strengthen buying power. It would make us grow faster than on our own,' he said.

Igor's plans to open another eight projects by the end of September and hopes to expand the restaurant chain to 30 outlets  this year.

The diversification may add to Chevalier's earnings but Mr Chow admitted that there were also challenges in the industry.

'Selling coffee is not much easier than selling computers. Food and beverage business is also competitive. Other challenges include the high rental cost and  maintaining a high standard of service across all shops in the chain,' he said.

'However, Pacific Coffee is having a healthy performance and there are a lot of expansion opportunities in Hong Kong while the outlook in China is also very promising. We will expand in Hong Kong, Shanghai, Beijing and Singapore and we will expand into more mainland cities.'

But Mr Chow said there were no plans to close the technology business, even though some fund managers want to see the company with a clearer business line.

'We don't have any plans to close the computer business. Although the computer business is very competitive we believe we can maintain it in a profitable manner. We are looking at what options we will make to clearly define the two business lines. Some suggest we sell the technology business to the holding company while some say we should simply close them. We are still reviewing different options to achieve the best for shareholders,' Mr Chow said.



Chevalier boss happy to stir things up