Shane’s – The Pawn Shop, Inc

Pawn Shop in Hong Kong

By Robert Li and Isabella Steger

: Bloomberg News; Pedestrians walk past the Oi Wah Pawnshop, left, and signage for the Tak Wah Pawnshop in Hong Kong, China, on Tuesday, Oct. 16, 2012.

Being the first of its kind will always draw some attention.

That’s likely to be the case for one tiny initial public offering that’s coming up in Hong Kong, with Oi Wah Pawnshop Credit Holdings Ltd. seeking to raise up to HK$98 million (US$12.6 million).

According to its prospectus to the Hong Kong stock exchange, Oi Wah, which operates 12 pawnshops in Hong Kong, has enjoyed a net interest margin of more than 42% for each of the past three financial years on its pawn loans. That’s pretty spectacular, compared to blue-chip lender Bank of East Asia Ltd., which reported its full-year 2012 results Tuesday, with a NIM of 1.7% in the second-half of the year.

The company mainly provides short-term secured financing including both pawn loans and mortgage loans, according to its prospectus. Pawn loans are collateralized against personal properties such jewelry.

The company says in its prospectus that despite the high level of concentration of banks in Hong Kong, non-bank lenders such as pawnshops are attractive because they enjoy greater flexibility in terms of their loan sizes and types of collateral, as they are not subject to the same restrictions imposed by the Hong Kong Monetary Authority.

It adds that while the majority of its customers are low-income and middle-aged, it is seeing growing demand from young people trying to satisfy their materialistic needs. Foreign domestic helpers and mainland Chinese are two important and growing sources of customers, it adds.

Based on its indicative price range of HK$0.75 to HK$0.98, Oi Wah is pitching its shares at 5.6 times to 7.4 times forecast price to earnings, which appears attractive. However, the paradox for its IPO is that the funds raised are intended to further develop its mortgage-loan business, which would see its mouth-watering NIM inevitably take a hit, given the company will then be competing heads-on with traditional lenders including banks.

Though no big funds will be drooling over the IPO given the tiny size – a HK$392 million market cap if it prices at the top end of the indicative price range – if may be worth a small punt for Hong Kong’s retail investors given the novelty factor.

Oi Wah is aiming to list on March 12.

Wall Street Journal