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Pawnbroking is big business in Asia – here are three best stocks to profit

Asian banks turn away millions of customers every year. Lars Henriksson explains how that's created a lucrative market for investors.

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Properly regulated pawn shops are spreading in Asia

I ran into an old acquaintance, a former investment banker, a few days ago. He was brimming with excitement over his new business venture.

"It will do well regardless of how the economy is doing", he said.

I was intrigued and asked him for more details.

With a smile, he explained his plans to enter the pawnbroking industry.

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Over the last few months, he's been preparing for the grand opening. He applied for a pawnbroking licence and invested hundreds of thousands of dollars in a huge safe. Just one product will be accepted: gold. It's easy to value, needs limited storage space and can be sold off easily.

The first outlet is due to open shortly, located in an old retail shop next to a high-street bank.

The proximity to the bank, he stressed, was crucial. Most bank branches have their own in-house security staff equipped with rifles which will hopefully deter potential criminals from the area. "Free security for me", he said.

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My friend's pawnbroker will also attract customers who have had their loan applications turned down by the bank.

The more he told me about the scale of the opportunity for Asian pawnbrokers, the more excited I became.

Lack of competition means pawnbrokers make enormous profits

By those criteria, about 20 million people in Thailand are excluded from normal banking. Similar situations exist across Asia. In addition, the continent is filled with millions of foreign workers who don't have access to conventional banks.

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There's no shortage of other options, but the problem is that most of them are very dangerous. Many borrowers end up falling afoul of ah longs loan sharks in Malaysia and Singapore, who charge exorbitant interest rates and have a stringent debt collection regime.

My friends tell me horror stories about how late payers are bombarded with texts and phone calls. They might find red paint splashed on their door or written warnings shoved through their letterbox. Next come the threats of physical violence.

Pawnbrokers, on the other hand, are strictly regulated, offer interest rates that are priced somewhere between conventional banks and loan sharks and involve no risk of harassment. It is also very difficult to obtain a pawnbroking licence, resulting in less competition and fatter profits.

As with many promising Asian investments, it is hard to find easy ways to invest in this sector. However, I did some research and came across three exciting candidates.

Three pawnbroker stocks from across Asia

Oi Wah Pawnshop Credit Holdings Ltd. (Hong Kong: 1319)

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In Singapore, Maxi-Cash Financial Services Corp Ltd. (Singapore: MCFS) deals in pre-owned jewellery and watches through pawnshops and retail outlets.

In Thailand, Srisawad Power 1979 Public Company Ltd. (Bangkok: SAWAD) provides personal loans, home loans, loans for international labourers, and other related financial products. It has also recently branched out into debt-collection and insurance broking.

All three of these stocks are set to grow enormously in the next few years. Here's why.

Investors haven't been paying attention to these three winners

Secondly, the stocks have received minimal research coverage (perhaps with the exception of Sawad).This suggests investors have yet to understand their business models.

Thirdly, the stocks are hard to classify, as technically speaking, they are financials', but not banks, insurance firms, etc.

Other investors will eventually wise up to the real value of these stocks, but by the time they do, most of the growth will have already passed them by.

Obviously, risks do exist. The main challenge for pawnbrokers is their dependence on external funding. There's also the possibility of regulatory changes as well as competition from high-street banks and other financial intermediaries.

However, this is an exciting theme and one we should keep an eye on.

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