What Breadtalk bosses told their shareholders (Breadtalk AGM 2010)

Wow… what a big difference between the AGM of a big firm like Genting to a smaller one like Breadtalk.

I was expecting a big ballroom filled with hundreds of investors with ushers waiting at every turn and corners plus wide spread of food and drinks. Instead, I found myself navigating through long dark corridors of a JTC like building into a the main meeting room of Breadtalk main office. The room can only fit about 12 a the table and about 20 around the room. It was an eye opener from the others AGM I have been. Wired at the beginning but  quickly grew to like the smaller and more intimate setting. It allowed me to have more air time with the decision makers in a more informal and friendly surrounding.

The meeting started with the chairman (Ong Kian Meng – aka ex-Tampines MP) addressing the investors and jump right into the AGM proper. It was a cold start but questions came freely after the first shot. Here is the highlights.

1) What challenges they saw in 2010 and where are they going in 2011.
-George Quek responded in Mandarin that 2010 was a learning year for them. They tried to expand in China but encountered a lot of issues. This can be since especially in their Restaurant (-8.8% operating profit) and food court business (they opened 3 but closed 4).
-Issues include high rate of expansion, higher food prices, investments in promotions and most importantly lack of experienced staff to build and run the business. This is very typical for smaller firms.
-He also said some of the location of the food court, bakery and food court was not ideal. So he rather close off non profit making outlet then try to correct them.
-There is also a fraud case that happened in Malaysia (not china). An employee forged a signature and withdrew almost $622K before they notice it. They have reported this to the authorities but don’t think they can get the money back. I asked if that is a process or a human issue. They say it is a human issue and said no process will 100% prevent this kind of issue.

2) Others
-I asked since Breadtalk is going to expand aggressively in China, why are they not looking for native Chinese Board of directors to help them. I asked because the current 2 independent directors are local MPs. They will definitely add value to the company locally, but I have my doubts they can add much in China. Especially since “Guan Xi” is vital in securing good business deals.
-A representative for a Chinese based investor was there and he made a very good assessment of Breadktalk’s current status. He mentioned that Breadtalk is not expanding fast enough. Without the economies of scales, it is very tough to improve the 3-5% margin in food business. Competition in China a very very strong and before they know it, copies will be everywhere. Copies in turns of store layout, concept and products. The good news is that Breadtalk still enjoys a good brand recognition there. So they have to seize this opportunity or else it will be too late. He offered the team resources if the company needs it.

3) So what is next?
-The focus will still be expansion in China. But this time round he will have 3 different CEO to look after the 3 key businesses. This hopefully will provide focus. He himself will also spend more time in China to personally oversee some key expansion strategy.  At the same he will asked one of his key staff that expended successfully in HK to move to China to oversee the expansion.

4) Resolution
-I ask why they are giving dividend since they are a growing company. Won’t their cash be better spent on reinvesting in their business? George replied that this has been his tradition. He says if the company can afford it, he would like to share with other shareholders. I think since he and his family has the largest shareholding, their family will benefit most from this.
-Another person asked how long has Ernst & Young been their auditors. The answer was since the company was set up. So the suggestion is to rotate auditing firm every 5 years to double make sure the accounts are accurate.
-I ask why they are asking for a 10% increase in Directors fee even though the company’s profits is down if you take away the asset sales. They replied that the compensation is the same, just that they added one more director.
-There was quite a bit of discussion about allowing the company to issue shares that may dilute the shares to as much as 20%. Several major shareholders objected to this resolution stating that 20% is pretty high. The normal for big corporation was 10%. But George explained that in the course of expansion, he may need to issue shares to potential partners if the opportunity arises.
-There is also a resolution to award George and his wife a total of 138K shares for reward and retention purposes. Many questioned the need, as the 138K share is not significant enough for them to make a difference and many think a better use will be for distributing to deserving employees. They took note of the suggestion but the resolution was still passed.

My take:
-with the new re-structure, the company will have 3 CEOs to help him to run the day to day activities but the control is still firmly in George’s hands. He and his family own more than 50% of the total shares and is set to get more. This is a bit worrying for me as this points to little diversification of ownership.
-Expansion in China is absolutely critical for the business to grow. But they are faced with tough competition and limited expertise. It will all boils down to execution in China. It will be very interesting to see the results by end of 3Q this year. It will give an indication if their plan is working or not.