ACCT 101 FINANCIAL ACCOUNTING Term 1, 2011/2012 Prepared for: Professor Tracey Zhang Chunqi SAKAE HOLDINGS LIMITED

Prepared by: G9 Group 7 Ng Wei Ting Roy Lim Cheng Teck StephenieKohKahIm Win HtutAung SimranKaur

Executive Summary
Sakae Holdings Limited is a Singapore based company that engages in restaurant businesses, particularly in Japanese dining. This report is written for the purpose of analysing the companys performance financially by exploring its trends and actions taken in the past few years. In order to gauge the level of performance achieved for the FY2009 and FY2010, we compare Sakae with its competitors such as Tung Lok Restaurants Limited and Japan Foods Holding Limited. Sakaes financial performance shows reliance on consumer sentiments, s ince the F&B industry is largely cyclical. Moreover, it faces near saturation in the Singapore market, and we shall identify if the company was effective in meeting such challenges. FY2010 was meant to be a fruitful year for the entire F&B industry as a whole, since all firms can benefit from the improvements in consumer sentiments along with economic recovery after the recession in 1H 2009. Sakae posted an increase in revenue of 2.1% in FY2010, reflecting that it was capable of riding on the trend to make a comeback after the recession. However, further comparisons have shown that the company underperformed in actual fact as its competitors were able to achieve even higher growths in revenue. In terms of liabilities, Sakae took a relatively conservative approach, decreasing its long term liabilities by 5.47% in relation to FY2009, while other companies took on additional loans to finance expansions to capitalise on the recovery of consumer spending. This allowed the company to achieve a below average debt ratio of 0.58, which may also be an indication that expansion plans are slowing. In general, we believe that Sakae did not fully capitalise on the possible prospects of growth in the year of recovery FY2010. While it faces ever growing competition in the F&B industry of Asia, it has not made effective decisions to expand itself though leveraging on borrowings. However, there are many possible approaches that can be taken given its current health in financial position, and it will depend greatly on the foresight of its directors, who will decide whether to maintain their conservative stance in time of imminent economic downturn, or utilise their prime position to expand now.

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Table of Contents
1. Executive summary 2. Content Page 3. Introduction
3.1 3.2 3.3 3.4 Company Overview Industry Overview SWOT Analysis Competitors 2 3 4 4 4 5 6 7 7 7 8 9 9 11 12 12 14 16 17 20 21 24 25

4. Financial Performance Analysis 4.1 Income Statement

4.1.1Revenue 4.1.2 Expenses 4.1.3 Income 4.1.4 Profitability Ratios 4.1.5Profitability Outlook

4.2 Balance Sheet

4.2.1 Assets 4.2.2 Liabilities 4.2.3 Equity 4.2.4 Financial Ratios 4.2.5 Cash Conversion Cycle

4.3 Cash Flow Statement 5. Conclusion References

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3. Introduction
3.1 Company Overview
Sakae sushi is a restaurant chain that serves affordable Japanese foods. Its operations first began in 1997 when the first outlet was opened in Singapore. With its concept of conveyor belt dining and quick service, the chain has since expanded to over 70 outlets across Singapore, Malaysia, Indonesia, Philippines, Thailand and China. It was listed in 2003 on Singapore Stock Exchange and it remains the flagship of its parent company, Apex-Pal, which operates other brands and services such as Hibiki, Crepes & Cream and Nouvelle events. Fig 3.1: Map of main geographical locations

Source: Sakae Holdings

3.2 Industry Overview

With reference to geographical locations of Sakaes operations, the report shall focus on the F&B (food and beverage) industry in Asia. Asia as a whole is a highly heterogeneous region with distinctive cultures, it is exemplified in the case of Singapore with its highly diverse cultures and developed F&B sector offering an extensive array of cuisines. The F&B sector is classified into 4 main groups of business; Restaurant, Fast Food, Food Caterers and others (cafes, coffee houses and canteens etc.). Fig 3.2: Number of Establishments
4000 2000 0
Restaurants Source: Singstats F&B Fast Food Outlets Food Caterers Others

According to Singapore Department of Statistics, restaurants form 35.2% of the total establishments for F & B industry in the country based on survey conducted on year 2010.

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3.3 SWOT Analysis

Strengths Sakae is well known for their brand since its success from 1998. It provides affordable Japanese dining with the incorporation of the unique conveyor belt concept, hence attracting wider ranges of customers with varying spending power. In comparison with peers that also provide Japanese cuisine, Sakaes restaurant appeals more to consumer groups such as students who are less capable of spending as much in general. Weaknesses Since establishment in 1997, Sakae has been growing in its scale of operations and consistently brought in higher revenues year on year. However, there is significant trend indicating that growth is near stagnation. Many F&B firms emerge from the economic recession in 2009 with substantial recovery in earnings, whereas the company itself performed below average. The F&B industry in Singapore is near saturation simply due to the face of low barriers to entry, hence strong competition in terms of food and service quality along with food variation. Sakae failed to focus on R&D efforts, which led to its inability to capture consumer preferences in the recent years. In addition, it faces new entrants such as RE & S enterprise, which rapidly expands in outlets as well as food selections. Opportunities Rising affluence in Asia creates opportunities for F&B firms in general. Sakae is poised to benefit from this since its businesses remain focused only in Asia, which may help to insulate its sales from todays European crisis to a certain extent. With increasing expendable income, larger portions of the Asian population will shift their dining habits from eateries to restaurants. However, given that if there is no improvement in food variety, Sakae may have difficulty capturing a share of the expanding market as well as its competitors. Threats Every F&B firm is vulnerable to increases in food costs and supply shortages. Their business is highly cyclical in nature and will fluctuate along with commodity prices. Hence, they can only gain an advantage over competitors by managing their costs drivers effectively instead of transferring the rising costs of production to customers. The reason would be due to the fact that consumer sentiment and preferences may easily change, and the abundance of substitutes in the case of Singapores F&B playing field will result in difficulty to maintain market share. Continuation of earnings will demand on popularity of the food products and shift in consumers preference away from Japanese sushi dining (case of 2011 Tsunami causing food radiation) will severely hurt Sakaes business.

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3.4 Competitors
For the purpose of financial analysis of Sakae Holdings, we compare various aspects of its performance against 2 competitors Japan Food Holdings Limited and Tung Lok Restaurants Limited. They have been selected based on their similarity in business operations and in addition, Japan Food allows us to assess specifically the performance of Japanese dining F&B firms. Japan Food Holdings Limited is an investment holding company that engages in operations of 49 restaurants in Singapore, Malaysia and Indonesia. Its ancillary business includes supplying food ingredients to franchises and sub-franchises. The company, along with its franchises and sub-franchises, serve Japanese fare under various brands such as Ajisen Ramen, Aoba, Botejyu and AjiTei. Tung Lok Restaurants Limitedis a Singapore based company that engages in the restaurant business with over 40 outlets through its subsidiaries such as Club Chinois Pte Ltd, Olde Peking Dining Pte Ltd, TLG Asia Pte Ltd, TungLok Arena Pte Ltd. The group also owns and manages the restaurants in other countries namely Indonesia, China, Japan and India.

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4. Financial Performance Analysis

4.1 Income Statement 4.1.1 Revenue
Revenue Recognition Sakae Holdings recognizes revenue at the fair value of the consideration received or receivable. The revenue from the rendering of food and beverage services is also recognized at the point of consumption or sale. Due to the fact that both Tung Lok and Japan foods adopted similar policies concerning revenue recognition as Sakae Holdings, revenue analysis of the three companies conducted by our group will result in fairer and more neutral results. Total Revenue Revenue Sakae Holdings Ltd Tung Lok Japan Foods 2010 (S$000) 90,717 81,343 43,743
Table 4.1

2009 (S$000) 88,817 73,427 33,550

% Change 2.1% 10.8% 30.4%

Sakae Holdings total revenue increased by 2.1% from S$88,817,000 in FY2009 to $90,717,000 in FY2010. Theres a significant difference compared to Tung Lok and Japan Foods, which received a double-digit growth of 10.8% and 30.4% increase in revenue respectively. From the table, we can see that Japan Foods revenue grew by a substantial 30.4% from FY09 to FY10. This is largely due to the groups new concept stores that brought in 13 million dollars of revenue. In contrast, Sakae Holding only grew 2.3% in terms of revenue. To account for this difference, we analyse the revenue breakdown of Sakae Holdings. Breakdown of Revenue Business Revenue Segment 2010 (S$000) 90,406 311 90,717 2009 % of Total (S$000) Revenue (2010) 88,628 99.6% 191 0.4% 88,817 100%
Table 4.2

F&B Business F&B Franchising Total Revenue

% of Total Revenue (2009) 99.7% 0.3% 100%

% Change 2% 62.8% 2.1%

From the table, we can see that theres a huge increase of revenue in the franchising. However, the increase is not significant enough to impact the overall revenue or Sakae Holdings. Though the main source of revenue is from their F&B business, theres only a marginally increase of 2%.

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Although the new outlet was opened in the heart of the city, the poor performance of Sakae Holdings might be attributed to the slow upturn in Asian economies. The economic uncertainty might have caused customers to be more prudent in their spending habits too. Besides, Sakae Holdings only opened an outlet whereas Tung Lok and Japan Foods opened 5 and 6 new outlets in Singapore respectively. The slow growth of Sakae Holdings compared to its competitors could also shows that Sakae are not recovering as well as other competitors after the recession in 2009. Geograhical Segment Revenue Singapore China Indonesia Malaysia Total Revenue 2010 (S$000) 68,115 2,113 20,489 90,717
Table 4.3

2009 (S$000) 70,450 2,323 16,044 88,817

As seen from the table, though a new outlet was open in Singapore, the overall revenue decreased from $70,450,000 in FY2009 to $68,115,000 in FY1010. Hence, the opening of the new outlet did not have a positive effect in the overall revenue. The decrease in revenue in Singapore was offset by the increase Malaysia contributions. The source of the 2% increase of overall revenue came from revenue from Indonesia and Malaysia. The strong competition in the F&B industry in Singapore might be a reason for the decrease in revenue in Singapore. Due to many upcoming Japanese restaurants, Japan Foods and Tung Lok might have a competitive edge over Sakae Holdings as their new outlets consist of unique and new concept restaurants. As the main business in Singapore drops in revenue, offsetting the increase in other countries, the increase of overall revenue is much smaller compared to the 2 other companies.

4.1.2 Expenses
Expenses Cost Of Sales Administrative Expenses Other Operating Expenses Income Tax Expense Finance Cost Total Expenses 2010 (S$000) 27,957 34,615 26,325 764 197 89,858
Table 4.4

2009 (S$000) 27,214 33,496 26,275 74 268 87,253

% Change 2.7% 3.3% 0.2% 932.4% (26%) 3%

As can be seen from the table, the overall expenses increased slightly from $87,253,000 in FY2009 to $89,858,000 in FY2010. The opening of a new outlet and the higher cost of food, rental and staff could be attributed to the slight increase in expenses. The increase in the cost of sales is expected due to the opening of a new outlet. The increase in administrative expenses might be driven by the depreciation of the Sakae
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Building and the higher staff cost. However, the more notable increase in expenses would be the income tax expense, which increased by 932%.

4.1.3 Income
Gross Profit Sakae Holdings Ltd Tung Lok Japan Foods 2010 (S$000) 62,760 56,256 34,061
Table 4.5

2009 (S$000) 61,603 51,356 24,805

% Change 1.9% 9.5% 37.3%

To determine the financial performance of a company, we will analyse the profit for the year. The marginal increase in expenses might drive the profit to decrease slightly. However, the gross profit increases slightly by 1.9% as the increase in expenses are not significant enough to offset the decrease in overall revenue. The lack of expansion in Sakae Holdings indeed has impacted their performance as compared to Tung Lok and Japan Foods, which Gross Profit, increase significantly. Net Income Sakae Holdings Ltd Tung Lok Japan Foods 2010 (S$000) 2,525 724 4,564
Table 4.6

2009 (S$000) 3,262 (2,575) 2,718

% Change (22.6%) 128% 67.9%

The Net Income of Sakae Holdings had dropped substantially by 22.6%. This can be attributed by the drastic increase of income tax expense. The decrease of net income is mainly due to the increase in Malaysia withholding tax and income taxes of $0.7million, which was paid in FY2010.

4.1.4 Profitability Ratios

We have analysed four ratios to assess the companys financial pe rformance, which are Net Profit Margin, Gross Profit Margin, Return on Assets, and Return on Equity. Gross Profit Margin Even though the Gross Profit Margin of Sakae Holdings for FY2010 had decreased due to the greater revenue boost than the gross profit, it surpassed that of Tung Lok, which had dropped more than 0.7%. However, Gross Profit Margin of Japan Foods had been the highest in both years, as can be seen in the table above. The decline in Gross Profit Margin proved that the Group had fallen in its capacity to generate profits from its revenue.

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Net Profit Margin Net Profit Margin Sakae Holdings Ltd Tung Lok Japan Foods 2010 2.78% 0.89% 10.43%
Table 4.7

2009 3.67% (3.51%) 8.10%

% Change (0.89%) 4.40% 2.33%

Sakae Holdings was less able to create profit from its sales in 2010 than in the previous years, which was shown by the decrease of about 0.9% in the Net Profit Margin. Both Tung Lok and Japan Foods showed a rise in efficiency in profit making from their revenues, with more than 4% increase for Tung Lok and over 2% for Japan Foods. Return on Assets (ROA) Return On Assets Sakae Holdings Ltd Tung Lok Japan Foods 2010 5.41% 2.8% 20%
Table 4.8

2009 7.5% -8.64% 14.65%

% Change -2.09% 11.44% 5.35%

According to the table below, ROA of Sakae Holdings fell by about 2% to 5.41% in FY2010, which means that Sakae had become less effective in utilizing its assets efficiently to generate profit, which is largely because of the drop in net income. Although the Groups ROA still exceeds that of Tung Lok, the latter showed a massive improvement of 11.44% increase from its mere -8% in 2009. The same goes for Japan Foods, which had risen in ROA as its profit also increased. Return on Equity (ROE) Return On Equity Sakae Holdings Ltd Tung Lok Japan Foods 2010 11.9% 10.73% 33.98%
Table 4.9

2009 16.1% -42.99% 29.16%

% Change -4.2% 53.72% 4.82%

ROE of Sakae Holdings dropped by 4%; however, because of the dramatic increase in that of Tung Lok, ROE of the Group had become almost the same as the Tung Loks with less than 1% difference in FY2010 from about 59% in the former year, as can be seen in the table. This pointed out that Sakae Holdings was earning less profit for the investments by the shareholders. Dupont Analysis is an analysis that breaks down ROE into three main components: profit margin, asset turnover and equity multiplier.

ROE =

Profit x

Margin

Asset Turnover

Equity Multiplier

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By using this analysis, we can elaborate further on the subject of why ROE of Sakae Holdings dropped in 2010. Sakae Holdings Ltd. 2010 2009 Profit Margin 2.78% 3.67% Asset Equity Sakae Turnover Multiplier Holdings Ltd. 1.8 2.37 2010 1.9 2.32 2009
Table 4.10

ROE

11.9% 16.1%

From the analysis, we can see that the decrease Profit Margin is mainly accountable for the fall in ROE, while the Groups asset efficiency and financial leverage shows minimal changes, and are less responsible for its decline.

4.1.5Profitability Outlook
Though Sakae Holdings might not be performing as well its competitors, the outlook of the F&B industry does look good in terms of the recovering economy. Sakae Holdings might be able to have a steady climb in revenue if they set to widen their footprint both locally and globally. Sakae holdings would be able to strengthen their market presence if they indeed expand globally in countries like the USA and India. Nevertheless, its importable for Sakae Holdings to keep their brand identity consistent across all markets as the demand for affordable food will increase and Sakae could boost their appeal of quality and value for money dining concepts in the market. On top of that, its essential for Sakae to keep their expenses under control to yield higher profitability.

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4.2 Balance Sheet 4.2.1 Assets

Fig 4.2: Sakae Holdings Total Assets 2010
2% 25% 3% 55% 12%
Other receivables & payments Inventories PPE Cash and Bank balances Trade receivables

2009
2% 14% 3% 14% 64% 3% 3%
Intangible asset

Source: Sakae Holdings Annual Report 2010

Sakae Holdings Total Assets 2010 S$000 Cash and Bank balances 12,535 Trade Receivables 1,452 Other receivables and payments 6,034 Inventories 1,755 PPE 27,617 Intangible asset 921 Total Assets 50,314
Table 4.11

2009 S$000 6,715 1,260 6,570 1,627 29,948 904 47,024

Overview of Total Assets Sakae Holdings witnessed an increase in its total assets from holding $47,024,000 worth of total assets for the year ended 2009 to holding $50,314,000 worth of total assets for the year ended 2010. It also experienced an increase of cash and bank balances by 58.2% between the years ended 2009 and 2010 alongside a slight increase in its inventory and intangible assets. However, Sakae Holdings showed a decrease in its other receivables and payments and its PPE. Although the company witnessed a decline in most of its total assets, the decrease is not a significant amount but should be duly noted with caution. This is because; a steady and constant decrease in these assets annually may eventually render the company unable to pay off all its creditors and debt holders.

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Current and fixed assets Trade Receivables Sakae Holdings witnessed an increase in its net receivables from 2009 to 2010. Its average collection period of 8 periods for both the financial years of 2009 and 2010 was relatively better than its competitors TungLok and Japan Foods, who both had an average collection period of 6 periods. This indicates that its growth in receivables was not in line with its cash flows. This growth however, might be in line with the efficiency of Sakae Holdings in collecting its receivables. Sakae Holdings did not reveal its bad debts figure in its income statement nor did it show its allowance for uncollectible accounts figure in its balance sheet. This might indicate that either Sakae Holdings does not have any bad debts since it is efficient at collecting its receivables, or that Sakae Holdings holds a very small and insignificant value of bad debts and allowance for uncollectable accounts. Inventory Since the inventory figure of the company seems to be increasing as each financial year passes, it may be assumed that Sake Holdings uses the cost flow assumption FIFO for the calculation of its inventory. This would account for the increasing inventory figure on the companys balance sheet alongside its increasing total assets. Fixed Assets From the balance sheet, Sakae Holdings witnessed a decrease in its PPE. When cross-referenced with its income statement, depreciation expense showed an increase from 2009 to 2010. This might suggest that Sakae Holdings uses the Units of Production depreciation method in order to depreciate its fixed assets. Hence, the value of its PPE seems to be decreasing after every financial period. Also, the income statement reflected that Sakae Holdings only had capital expenditure for the year ended 2009 and no capital expenditure for the year ended 2010. The income statement reflected significant loss on disposal of Sakae Holdings PPE f or the year ended 2010. This might suggest that it is not in Sakae Holdings company strategy to invest in re-vamping or re-furnishing their PPE and that the companys PPE have long useful lives and are of top-notch quality. It may suggest that the company prefers to direct its profits towards other aspects. Intangibles Sakae Holdings saw an increase in its intangibles form 2009 to 2010. Since the increase in intangibles was not a significantly sizeable increase, it might be concluded that the valuation and amortization of the companys intangibles is not ideally large as compared to its competitors. The company did not give sufficient disclosure as to the exact breakdown of intangibles recognised in the annual report. Hence, a fair analysis cannot be made against Sakae Holdings as the lack of information may not give an astute account of the exact recognition of the companys intangibles.

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4.2.2 Liabilities
Sakae Holdings Current Liabilities 2010 S$000 2009 S$000 Trade Payables 8,509 Trade Payables Other payables 3,117 Other payables Due to subsidiaries - Due to subsidiaries Income tax 124 Income tax Payable Payable Bank loans 7,807 Bank loans Total current 19,557 Total current liabilities liabilities
Table 4.12

8,232 3,624 5 4,820 4,820

Current Liabilities Sakae Holdings saw a sizable increase in its total current liabilities. Majority of its contributing figures aroused form its increase in trade payable and the significant increase in Sakae Holdings bank loans. Judging from its increasing total current liabilities figure, Sakae Holdings does not seem to be amidst a financial position where its liabilities are fully secured. Their total current liability against their total current assets just about covers the company. This might indicate that the company is not backed up with enough collateral and either needs to keep a tap on the amount of debt it incurs, be more efficient in its paying off its creditors or increase its value of its total current assets. Sakae holdings may prefer to secure its liabilities as soon as possible in order to avoid restrictions imposed on them by its creditors. Non-Current liabilities Total Non-Current Liabilities Sakae Holdings TungLok Japan Foods 20010(000) $9,536 $5,915 $2,067
Table 4.13

2009 (000) $10,088 $2,634 $790

% Change (5.47%) 124.56% 161.65%

Sakae holdings has seen a decrease in terms of long term liabilities of 5.47% in relation to 2009, this is due largely to the companies positioning as a low end food solution that was not hit hard by the tightening of consumers spending during the down turn. This is compared to the industry average change in liabilities coming out of the recession of 93.58%, where companies took on additional loans to finance expansions to capitalise on the recovery of consumer spending. *IDA- Average among the 3 comparative companies

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Break down of Bank Loans Break down of loans Long term bank loan (secured) Short term bank loans (unsecured) Sakae Holdings 2010 '000 2009 '000 $10,429 $9,913 $5,200 $3,250 $15,629 $13,163 (7,807) $7,822 (4,820) $8,343

Less: Current portion of long term loan Non-current portion

Table 4.14

The $10,429,000 Long term bank loan taken in 2010 was for the construction of new operational headquarters, which is also pledged as security for the loan. Short-term loans of $5,200,000 (2009: $3,250,000) bearing interest at 1.49% to 1.71%(2009 : 1.56% to 1.97%) per annum are due for settlement within 12 months and are rolled overupon maturity period of one month (2009 : one month). Debt Ratio Solvency ratio Sakae Tunglok Debt ratio 0.58 0.81 *IDA- Average among the 3 comparative companies
Table 4.15

Japan Foods 0.43

IDA 0.61

Sakae holdings are in a relatively stable position, with a debt ratio of 0.58 that is below the average of the three companies. The debt claim on assets can still be improved if we compare it with Japan foods with a debt to assets claims of only 0.43. Debt to Equity Ratio Borrowings Sakae Tunglok Japan Foods 0.76 Industry Average 2.16

Debt to Equity Ratio 1.37 4.35 *IDA- Average among the 3 comparative companies
Table 4.16

Debt to equity ratio shows how much leverage the company is able to gain in relation to equity. Thus in more comparative terms, TungLok (similar size with regards to assets) has borrowed 4 times that of equity. There is room for Sakae to make use of debt to finance its growth operations, and obtain additional facilities available for them to generate growth opportunities.

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4.2.3 Equity
Ratio Price Earnings Ratio P/E Earnings Per Ordinary Shares (EPS)(cents) Book Value (S$) Dividend per share Earnings Per Share Sakae Holdings has a moderate EPS and a decrease of 0.52 coming out of the financial crisis in 2009. Their EPS is healthier compared to TungLoks, but almost half that of Japan Foods. Therefore with comparison to a growth company like Japan Foods, there is still room for Sakae to improve earnings. However when we compare Sakae Holdings to TungLok in the debt to equity section earlier, It was also noted that they could have been more efficient in using capital to generate income and the company could benefit from being more effective in its growth plans. Price Earnings Ratio As a result, Sakae Holdings P/E ratio has suffered, as investors are aware that the company is again not generating enough growth and questions are being asked that apart from their only successful venture of Sakae sushi, their main restaurant chain. There is little momentum left in the company for future expansion. This can be exemplified by the fact that TungLok which under performs in terms of EPS compared to Sakae Holdings but investors value the prospects better and are willing to pay 37 times per dollar compared to only 11 for Sakaes. Sakae holdings lack of a sustainable growth solution might be a problem because it is spreading its operations and reach into many different food concepts and ventures, and ultimately not finding success. This can be traced back to FY2008 when they recorded operating losses of $3,792,000, due to rising food costs and rentals, salary, operating losses incurred by overseas subsidiaries and impairment losses from business units that have been shut down or restructured. Their business model has not changed since, setting up another 2 companies under the name Yummy Venture Pte Ltd on 16th June 2009 and Alliance Support Services Pte Ltd on 22nd October 2009. This carries variable risk as Sakae holds 100% of equity interest in Yammy Venture Pte Ltd and a significant stake in Alliance Support Services Pte Ltd. Sakae holdings might find it difficult to expand its operations in the current competitive food industry, and choice locations for its primary Sakae Sushi restaurants are more difficult to come by. Sakae Holdings 2009 2010 8 11 2.3 1.78 0.14 NA 0.15 0.01
Table 4.17

Tunglok 2010 37 0.46 0.05 NA

Japan Foods 2010 5 5.18 0.15 0.005

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Book Value MKT price Sakae Holdings *MKT market price FY2010 0.19
Table 4.18

FY2009 0.19

In terms of residual value, the companys stock price has seen very little movement, ending both FY at market price 0.19 per share. Similarly, for the year ended 2010 the market values 0.4 cents above its current equity. Dividends It is noted that Sakae holdings pays 0.01cents per share; twice that of Japan Foods which is a growth company in the local F & B industry. This is because high-growth companies rarely offer dividends as all of their profits are reinvested to help sustain their growth. However, this is lacking in Sakae holdings.

4.2.4 Financial Ratios

SakaeHoldings 2009 2010 0.97 1.11
Table 4.19

Current Ratio Current Ratio

TungLok 2010 0.86

Japan Foods 2010 2.52

The current ratio for the year ended 2010 increased by 0.14 from 2009. However, Sakaes 2010 current ratio falls within the ranges of 1.0 to 1.5, a low range, which might indicate that Sakae holdings may not be able to pay off the large amount of debt it has incurred. The company may require a longer time than expected to pay its creditors. Although, Sakae Holdings seems to be doing much better than its competitor TungLok whose current ratio is 0.86, it pales in comparison to Japan Foods whose current ratio is 2.52. This might suggest that while Sakae Holdings does better than some of its competitors, it may not be on par with the majority of its competitors for the year ended 2010. SakaeHoldings 2009 2010 0.85 0.71
Table 4.20

Acid Test Ratio Acid-test Ratio

TungLok 2010 0.75

Japan Foods 2010 0.37

Sakae Holdings acid-test ratio decreased from 2009 to 2010 by 0.14. A relatively preferable acid-test ratio is one that is over 1.0. This once again suggests that the company may not be able to pay off its debts and that the companys inventory is not very liquid. Sakae seems to be placed in the middle when it is compared against its competitors TungLok and Japan Foods. While Japan Foods has an acid-test ratio that is slightly lower than that of Sakae Holdings acid-test ratio, TungLoks acid-test ratio is slightly higher than that of Sakae Holdings acid-test ratio.

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Working Capital (S$000) Working Capital

SakaeHoldings 2009 2010 (362.5) 1724.4

Table 4.21

TungLok 2010 (3,174,889)

Japan Foods 2010 2,177

The working capital increased from being a negative figure in 2009 to it being a positive figure in 2010 by 1361.9. This figure suggests that Sakaes current asset exceeds its current liabilities; this figure does not necessarily suggest a strong working capital. Its current assets figure ($21,766) is relatively close to its current liabilities figure ($19,557). Seeing as how the company seems to garner most of its debt from trade payables and bank loans, it is risky for the company to hold comparatively, too meagre an amount in current assets when its debt figure is relatively high and likely to exceed its total current assets. While Sakae Holdings, in terms of its working capital, seems to have exceeded TungLok figure, Japan Foods shows a significantly higher figure in terms of its working capital when compared to Sakae Holdings. This once again puts Sakae Holdings in the midst of its competitors financial figures. SakaeHoldings 2009 2010 15.33 46.93
Table 4.22

Receivable Turnover

TungLok 2010 56.62

Japan Foods 2010 60.50

Receivable Turnover Sakae Holdings witnessed an increase in its receivable turnover by 31.6 from 2009 to 2010. This increase suggests that Sakae Holdings may be more equipped than before to host an efficient extension of credit and collection of accounts receivables than compared with the previous year. However, judging from its trade receivables figure ($1,452) it is more likely that Sakae Holdings does not use its assets efficiently and does not extend credit well. Both TungLok and Japan Foods have much higher receivable turnovers than Sakae Holdings. This seems to depict the company in question as being the least capable of collecting its accounts receivables when compared with its competitors.

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Inventory Turnover Inventory Turnover

SakaeHoldings 2009 2010 17.13 16.53

Table 4.23

TungLok 2010 12.81

Japan Foods 2010 17.26

There was a slight decrease by 0.6 in Sakae Holdings inventory turnover, from 2009 to 2010. The company, as compared to its competitors is about on par with the industrial average of inventory turnovers and has a slightly higher inventory turnover than some of its rivals. This may suggest that either Sakae Holdings has high sales which requires it to be well stocked or that it experiences weak sales, hence the build-up of unused inventory that faces the risk of becoming obsolete. Sakae Holdings once again has financial figures that position it between its competitors. While its inventory turnover was significantly higher than that of TungLoks, its inventory turnover was slightly lower than that of Japan Foods for the year ended 2010. SakaeHoldings 2009 2010 10.42 10.02
Table 4.24

Payable Turnover Payable Turnover

TungLok 2010 10.53

Japan Foods 2010 22.99

There was a slight decrease of 0.4 in terms of Sakae Holdings payable turnover from 2009 to 2010. This seems to suggest that the company is taking a longer period of time than expected to pay off its suppliers than it could previously. Furthermore, Sakae Holdings competitors both experienced significantly higher payable turnover figures which might suggest that Sakae Holdings may not be as capable as its competitors in paying off its suppliers in the expected period of time.

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Cash Conversion Cycle (CCC) Average Inventory Period Average Collection Period Average Payment Period Cash Conversion Cycle

Sakae Holdings (2009) Resident 23 8 157 -126

Sakae Holdings (2010) 22 8 153 -123

Tung Lok (2010) 29 6 267 -232

Japan Foods (2010) 58 6 243 -179

Table 4.25

4.2.5 Cash Conversion Cycle

From the table above, we can easily notice that all three companies have negative CCCs: It is normal for the restaurant business to have short CCCs as food are perishables, the inventory resident period is low, and because it is cash business and mostly has cash transaction, the receivable collection period is much shorter than other forms of business. And when these two periods get so low compare to the payable outstanding period, the negative CCC can result, as can be seen in the table, which means that the companies are selling their inventories and collecting their receivables before they have to pay their suppliers. It is an ideal situation as the companies will have access to their excess cash until their payment dates, giving them opportunity to create even more income and profit from investments and other activities. When the comparison is made among the three companies, Sakae Holdings has the longest CCC within the range of -232 to -123day. The company has also increased in its CCC from -126 to -123, causing it to be much more incapable of matching up to its peers. Moreover, the gap between Sakae Holdings CCC and those of its rivals, Japan Foods and Tung Lok, is over 50days and 100days respectively, which means that the company has to pay for its inventory at least 50days earlier, while its competitors are enjoying the longer payable periods and having more chance to maximize their cash flows through various means, thereby leaving Sakae Holdings at a disadvantage. Overall, although Sakae Holdings has quite a low CCC and has a lengthy period of 123days to use its interest free cash that is to be paid to its suppliers when due, the comparison with its peers has revealed its inefficient cash flow when considering at the industrial level.

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4.3 Cash Flow Statement

Sakae Holdings Cash Flows Net Cash from Operating Activities (CFO) Net Cash used in Investing Activities (CFI) Net Cash from Financing Activities (CFF) Cash and Bank balances at end of year 2009 (S$000) 3,760 (939) 1,222 6,715
Table 4.26

2010 (S$000) 7,244 (2,480) 1,046 12,525

% Change 92.66% 164.11% (14.4%) 86.52%

In alignment with global economic recovery since 1Q 2009 recession, Sakae managed to improve its cash position by 86.52% after FY2010. This was actually driven by substantial increases in cash inflows from operating activities, while financing activities maintained relatively stable. There is an increase (164.11%) in cash outflows from investing activities. However, this is not an indicator of the Groups expansion plans, since 2009 figures were lower due to a one off event of receiving proceeds from disposal of a freehold property. Net cash inflow from operating activities in 2010 was significantly higher than in 2009. However, this was not driven by a strong increase in profits before tax, but a substantial fall in trade payables. This indicates that the group may have delayed their periods in financing for their supplies, or may have chosen to use their cash balance for purchasing instead of owing payables. Furthermore, this is in line with the analysis on its revenue, where there is minimal growth observed. Overview of Cash Flows Fig 4.3.1: Cash Flows from 2007 to 2010
10000 5000 S$ ('000) 0 2007 -5000 -10000 -15000 CFO
Source: Sakae Holdings Annual Reports

2008

2009

2010

CFF

CFI

With reference to Fig 4.3, Sakae has been able to accumulate a healthy cash flow balance since 2008. By 2010, cash and bank balances reached $12,525,000. This was due to the fact that there were significant decreases in investing activities in the period of 2009 with the Group slowing down in its expansion progress. Such move was favourable, considering that there could have been stronger negative impacts from 1H 2009 economic recession on its business. However, idle cash continues to
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accumulate in year 2010 despite economic recovery, indicating that the management could have incurred the opportunity costs of losing investment opportunities. In general, Sakae approaches maturity stage in its business life cycle when it begins to slow down in terms of growth, maintain its investments, and generate sufficient cash to fund for operations and financing. Free Cash Flow (FCF) Free cash flow is used to determine the amount of money that a company is able to generate after including expenditure for maintaining or expanding its asset base. FCF is necessary as it determines how well the company is in position to pay for debt, dividends, or make acquisitions. Sakae Holdings Free Cash Flow 2007 (S$000) (1,133) 2008 (S$000) (13,743)
Table 4.27

2009 (S$000) (5,400)

2010 (S$000) 4,763

Sakae gears towards higher FCF in the past years, with the exception in 2008 and 2009. The large negative figure in 2008 was attributable to the financing for the acquisition and construction of a new headquarters in Singapore, while in 2009 it suffered lower CFO due to economic recession. FCF/CFO Ratio 2009 2010 Sakae Holdings (1.66) 0.66 Tung Lok Restaurants (2.70) 0.46
Table 4.28

Japan Foods Holding 0.31 (0.17)

By comparing FCF to CFO ratios, we can determine how well Sakae earns cash to cover capital expenditures (CAPEX). In 2010, we see a positive ratio of 0.66 achieved,therefore indicating that they were capable of doing so. However, this raises the concern if CAPEX is being reduced. CAPEX Sakae Holdings 2007 (S$000) (9,477) 2008 (S$000) (15,595)
Table 4.29

2009 (S$000) (8,660)

2010 (S$000) (2,481)

With reference to the table 4.29, it substantiates our worry as mentioned above as CAPEX has been on a decreasing trend since 2008. Even though this may be assumed as a safer business strategy amidst the 2009 crisis, we assess the possibility that lowering CAPEX may have caused Sakaes assets to deteriorate for the past few years.

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Fig 4.3.2: Cash Flow Margins (CFM)

0.3 0.25 0.2 0.15 0.1 0.05 0 2007 Sakae
Source: OneSource Annual Reports

2008 Japan Food

2009 Tung Lok

2010

Cash flow margins are used to measure how well a company generates cash from sales. Sakae Holdings have been able to generate positive cash flow from their operating activities, therefore achieving a relatively stable CFM ratio that remains in the positive region for the past four years. In this aspect, it performs slightly below average compared to its peers, having the lowest CFM ratio out of the 3 firms in 2008 and 2010. Going forward from Sakaes performance in 2010, we may see further reduction in the pace of expansion plans, therefore translating to a more stable CFO and CFM. Hence, it may be unable to outperform Japan Foods and Tung Lok in terms of CFM within the near term.

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5. Conclusion
The analysis of Sakae Holdings has brought us to a conclusion that the company gears towards more stagnant performance in the coming years. Its improvement in financial outlook and growth in revenue were brought on by the economic recovery in 2010, yet these are also the aspects which it failed in outperforming its competitors. While it holds position and branding in Asia now, we feel that it may lose its lustre in competitive advantage going forward. In this competitive F&B industry, Sakae Holdings does have to closely monitor existing and upcoming competitors. Having said that, due to their extensive geographic diversification in developing economies, they should be able to leverage the opportunities and perform well among these regions if they extend and continue to expand their footprints globally. Sakae Holdings evidently proves to become a more matured restaurant business.By looking at its profitability, it is apparent that the companys increase in sales is not followed by its increase in profit, which shows that the company is having difficulty in maximizing its profits through the use of resources and assets it has in hand.In terms of Cash flow, there is an increase in liquidity as a result of the ease in payments for borrowings, coupled with a strong balance of cash accumulated in 2010.To sum it up, such an outlook would imply that Sakae will be better positioned to take up new investing activities, pay out better dividends, or ride out possible economic recessions. However, this was the outcome of adopting a less risky strategy in managing business operations as compared to its peers which we view to be unfavourable for the company. Sakae faces fierce competition in the F&B industry, therefore the need for constant improvements and innovation of products in order to maintain or capture higher market share. From its results of financial performance in the past years, we fear that Sakae has failed to grow in pace with its competitors, such as the case of revenue growth year-on-year. This brings us to the assumption that if it were to lose its position as the flagship of its parent company in the future, investors will lose interest and therefore not being the company of choice for investing.

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References
Annual Reports: Sakae Holdings Limited Annual Report 2010 retrieved from
http://globalbb.onesource.com.libproxy.smu.edu.sg/Web/Reports/AnnualReport.aspx?Report ID=GRC_9924188081&process=CP&file=file.pdf

Sakae Holdings Limited Annual Report 2008 retrieved from

http://globalbb.onesource.com.libproxy.smu.edu.sg/Web/Reports/AnnualReport.aspx?Report ID=GRC_12414149449543DEF&process=CP&file=file.pdf

Japan Foods Holdings Limited Annual Report 2010 retrieved from

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_3660AF75ABFBB2124825772E0 00F5B1C/$file/FY2010_Results_Announcement.pdf?openelement

Tung Lok Restaurants Limited Annual Report 2010 retrieved from

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_86C41BD351F97FD24825789D 0036398E/$file/ANNOUNCEMENTTEXT-FYMAR11.pdf?openelement

Articles:
http://info.sgx.com/webcorannc.nsf/AnnouncementToday/BAA7E021AC99676F48257715003304 4E?opendocument http://www.apexpal.com/Files/Apex-Pal%20AR08%20for%20SGX.pdf

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