Cover Story: Wishing on a new star

This article appeared in Corporate page, The Edge Malaysia, Issue 790, Jan 25-31, 2010

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.”

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.

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.