Guess how many IPOs Bursa Malaysia generated compared to SGX in 2024?
55 vs 4. If this was a football match, the scoreline would be atrocious.
And now, heading to mid 2025, while SGX is still waiting for its first IPO, Bursa is already marching towards its 20th.
However, none of those 20 can compare to the upcoming one.
Eco-Shop
Eco-Shop Marketing Berhad (KLSE: ECOSHOP) might not have a presence in Singapore. But Singaporeans who frequently travel to JB would recognise its bright red storefront.
Eco-shop is a dollar shop that is growing rapidly in Malaysia. The dollar shop business model has slowly garnered traction in Malaysia over the years. Higher living expenses and the infiltration of cheaper made products, mostly from China has validated the business case for dollar shops. Mr DIY Group (M) Bhd (KLSE: MRDIY) has its dollar shop business under the MR DOLLAR brand.
Daiso, the popular dollar shop from Japan is also widely available in Malaysia, albeit more in malls.
Eco-shop started off as a dollar shop selling kitchenware, cleaning equipments, plasticware but has since included groceries as its offerings. Over the years, it has grown its presence across Malaysia, with 368 stores spanning all states and Federal Territories.
With MR DIY focusing more on electrical items and home furnishing tools, while 99 Speed Mart Retail Holdings Bhd (KLSE: 99SMART)‘s strength is on perishables, Eco-shop’s value proposition and offering sits somewhere in between, offering a bit of everything to hopefully help solve cost-conscious Malaysians’ pain points – time and cost.
The dollar shop business model
The dollar shop is essentially a logistics sales channel play in getting goods to as much consumers as possible.
Traditionally, big supermarkets are strategically situated in prime areas, which families and consumers need to physically commute to and fro to get their daily or weekly supplies.
But in countries like Malaysia, where the number of vehicles on the road is always increasing, it has brought an unwanted side effect – traffic jams and insufficient parking.
Yes e-commerce might have helped alleviate some of this, but I am pretty sure most Malaysians would agree that there are more and more cars going after a limited number of parking bays in prime shopping areas.
This scenario has provided a solid business case for dollar shops and mini markets – bring essentials as close to the consumers as possible. Focus on the quantity of stores rather than the quality.
This model proved to be effective – MR DIY and 99 Speedmart have already proven that this model is workable. The only downside – what used to be hard to replicate has now become much easier — with ample funding available, new players can enter the space quickly.
IPO proceeds and game plan
Eco-shop was set to raise close to RM 420 million through its IPO. A big chunk of it – close to 50% will be for its distribution centre expansion plan. The distribution centre will be based in Selangor, which will be the crux and heart of distribution in the West coast of Peninsular Malaysia.
Additionally, 13.4% is earmarked for new store openings, while 24% will be for repaying bank borrowings. The balance will be allocated to IT hardware and software and working capital.
However, the latest news announced that the company will be slashing its IPO price down to RM 1.13 per share, down 6.6% from the initial price of RM1.21 per share. Due to the lower capital raised, the portion apportioned for IT hardware and software investment will be reduced accordingly.
Financial snapshot
Top line growth wise, Eco-shop gained +26.44% for FY 23 versus FY 22, with the growth moderating to +20% for FY 24 versus FY 23.
Due to the economy of scale, net profit jumped more than its top line growth. This means that revenue does not have to grow at break neck speed for the company to grow its bottom line. But for competitiveness, the gross margins will most likely stay well below 40%, with little room for improvement. The net margin would also be capped to ensure competitiveness for its business to scale. Operating efficiency would be crucial, hence the major capex on distribution centres and opening of more stores.
The average value of each transaction reflects the target customer. An average transaction of less than RM30 shows that the company thrives in selling affordably priced items at scale. The growing number of transactions per store per day shows Eco-shop is growing its customer base.
Competition / Peer-to-peer analysis
The independent research report from Frost and Sullivan compares Eco-shop with North American Dollar Stores, MR DIY and DoHome PCL and Siam Global House PCL from Thailand.
I am surprised to see Eco-shop going head to head in terms of average sales per sq. ft. and average sales per store with the North American dollar stores. Since the dollar store concept is still rather nascent in Malaysia, CAGR sales and store growth are enjoying the spurt, which is also evident for MR DIY.
While this comparison paints Eco-shop as the most promising amongst its local competitor like MR DIY, my only question will be is this already the best, and thus the steepest valuation and the right time for the company to go public?
Creador, one of Malaysia’s most successful private equity firm, owns 10% of Eco-shop and is also a beneficiary of the MR DIY IPO as one of the key shareholders. So there is some reservations in me when it comes to looking at companies where private equity or venture capital have stakes in positioning for IPOs.
Risks
With the prospectus and independent research report painting Eco-shop with prospects and its position as market leader in the Malaysia dollar store space, I choose to focus more on the risks and pitfalls.
To reiterate, it is commendable for Eco-shop to broaden its offerings as its chain of stores grow. But venturing into perishables and groceries means it goes head to head with 99 Speedmart, which already excels in this segment. And if the competition toughens up, the loser will incur loses, as perishables have an expiry date and freshness requirements. When an Eco-shop opens next to 99 Speedmart, which store would a consumer enter?
The similar could happen if Eco-shop slowly ventures into boundaries currently led by MR DIY. Although home improvement items are not perishables, but if demand does not grow as fast as supply does as what we are observing now, there will definitely be a losing party that sees inventories eventually piling up.
As much as the company is riding the flywheel of economies of scale by expanding outlets and presence, there will come a point where stores start cannibalising each other, especially for a business that remains only in Malaysia as of now.
Not to also mention, the lukewarm reception and the reduction of its initial listing price could mean that shares could dip below IPO in the first few weeks of trading.
My verdict
How would you see Eco-shop 10 or 20 years from now?
One cannot really predict the actual future, but if everything plays out well, I can see Eco-shop playing a pivotal role in the daily lives of Malaysians.
Maybe the company would have diversified to other businesses that complement its current model, similar to MR DIY venturing into the dollar store space.
Maybe the company would have improved its store presence as Malaysia becomes a higher earning income country.
Eco-shop’s IPO valuation will be RM 7 billion. Comparing that with MR DIY’s closing price as of recently, of RM 15.9 billion, Eco-shop is roughly half the size of MR DIY.
Revenue wise, it does look fair, since MR DIY roped in a revenue of RM 4.7 billion in FY 2024, also roughly 2x more than Eco-shop. But from a margin perspective, where MR DIY is around 12%, Eco-shop’s valuation appear skewed towards the premium side.
My concern, similar to MR DIY and 99 Speedmart, lies on the potential bottleneck and room for growth if these companies remain as local companies with not much intention to expand. And as competition increases, these 3 rapidly growing businesses will eventually lock horns.
But hey, don’t let the fundamentals get in your way if it’s for the thrill of experiencing potential upside when the stock starts trading. But just don’t go into it thinking that the runway for growth will be smooth sailing and that the business is a no-brainer long-term compounder.
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