IPO by pawnshop chain designed to grow mortgage loans

IPO designed to enable Oi Wah Pawnshop Credit to boost its growing property mortgage business as company's cash flow turns negative

PUBLISHED : Thursday, 28 February, 2013, 12:00am
UPDATED : Thursday, 28 February, 2013, 5:02am

Oi Wah Pawnshop Credit, a pawnshop operator providing fast cash to Hongkongers, plans to tap the capital markets for the first time in its 37-year history as it expands further into mortgage loans.

The company started its mortgage business in 2009, with mortgage loans surging to HK$67 million in November last year from HK$4 million in February 2010.

It has 80 mortgage loan customers, of which half are returned clients.

Pawn loans grew to HK$414 million from HK$361 million over the same period.

Oi Wah's chairman and chief executive, Edward Chan, 41, who also serves as a representative for the Chan family, the controlling shareholder, said the lengthy and complicated credit approval process at local banks had created opportunities for Oi Wah.

The initial public offering comes at a challenging time for the company.

Oi Wah's net operating cash flow turned negative between February and November of last year, suggesting that the loan repayment process may be slower than planned.

The firm posted a negative net operating cash flow of HK$20.6 million in November, a turnaround from a positive cash flow of HK$8 million in February last year, while cash and cash equivalents dropped to HK$6.6 million from HK$9.6 million, reflecting a slowdown in loan receivables, the listing document says.

The first legal pawnshop was set up in Hong Kong in 1926. But with the industry's main customers today either aged, with a monthly income of less than HK$8,000, or foreign domestic helpers who look for short-term financing, pawnshops are looking to transform themselves.

Oi Wah, whose initial public offering is the first of its kind in the city, provides cash in return for valuables such as gold, jewellery, watches, diamonds, the latest electronic gadgets and even flats or commercial properties.

It charges interest rates of as much as 41.5 per cent per year on pawn loans and 15 per cent on mortgage loans.

The company, which was established since 1975, plans to raise up to HK$98 million to expand its footprint in the mortgage-loan business, targeting households and troubled small- and medium-sized enterprises.

It has 40 staff in 12 pawnshops, some operating under the name of Kei Wah, in populous areas such as Wan Chai, and also Sheung Shui, where mainlanders and cross-border businessmen are major clients, thanks to its location near the border.

Despite a slew of government-led curbs, property prices have continued to rise, posing a severe risk to the domestic economy, because half of the outstanding loans in the city are based on real estate collateral.

A sharp price correction would lead to falling collateral values and negative wealth effects, which could trigger a slide in economic activity, bank lending and the property market.

Oi Wah said it could face liquidity risks as the mortgaged properties might not be readily sold in the market in the event of loan defaults.

Chan, who has led the firm since 2000, commenting on a potential a sharp correction in Hong Kong's red-hot property market, said Oi Wah had adjusted its property valuations, such as making a 10 per cent reduction in the market value of commercial buildings, after it found hot money had flowed into non-residential estates.

With a 10 per cent market share, Oi Wah is the largest pawnshop operator in Hong Kong by sales.

The company said it had no plans to buy other pawnshops in a bid to strength its influence and raise bargaining power.